International financial relations under the current float: evidence from panel data

This paper uses multi-country data for the period 1973±1994 to investigate ®ve key equilibrium conditions in international ®nanceÐpurchasing power parity, the Fisher equation, uncovered in-terest parity, and the equity-return analogues of the latter two. The results are largely consistent with theoretical expectations. Over the long run, purchasing power parity, uncovered interest par-ity and the Fisher effect prove to be rather good ®rst approximations. The equity-return relations, though somewhat less so are nevertheless much better behaved than past studies would lead one to expect. Average rates of equity returns keep pace with in¯ation within countries in almost all instances; across countries, they are positively correlated with average rates of in¯ation. This is particularly the case when the data period is extended to include earlier decades. In international ®nance as in other areas of economics, there are certain key relationships that loom large in our thinking. Like the model of the competitive ®rm in price theory, these relationships are regarded both as useful empirical ®rst approximations and as points of departure in other, more complex, theo-retical analyses