Covered Interest Parity and Speculative Efficiency: Some Empirical Evidence for Australia*

Abstract

Two key relationships which feature prominently through out modern international monetary theory are: (i) covered interest parity and(ii) speculative efficiency of the foreign exchange market, i.e., the unbiasedness of the forward rate as a predictor of the spot rate. This paper presents some empirical evidence for these two hypotheses using Australian data over the period September 1974 to December 1981 during which the Australian dollar was essentially floating. Both quarterly and overlapping monthly data are used. The results obtained generally provide some support for the two hypotheses.

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