Veroffentlichungen des DIW Berlin
Christian Dreger
Does the Nominal Exchange Rate Regime Affect the Real Interest Parity
Condition?
The real interest partity (RIP) condition combines two cornerstones in international finance, un-
covered interest parity (UIP) and ex ante purchasing power parity (PPP). The extent of deviation
from RIP is therefore an indicator of the lack of product and financial market integration. This
paper investigates whether the nominal exchange rate regime has an impact on RIP. The analysis
is based on 15 annual real interest rates and covers a long time span, 1870-2006. Four subperi-
ods are distinguished and linked to fixed and flexible exchange rate regimes: the Gold Standard,
the interwar float, the Bretton Woods system and the current managed float. Panel integration
techniques are used to increase the power of the tests. Cross section correlation is embedded via
common factor structures. The results suggest that RIP holds as a long run condition irrespectively
of the exchange rate regimes. Adjustment towards RIP is affected by the institutional framework
and the historical episode. Half lives of shocks tend to be lower under fixed exchange rates and in
the first part of the sample, probably due to higher price flexibility before WWII. Although barriers
to foreign trade and capital controls were substantially removed after the collapse of the Bretton
Woods system, they did not lead to lower half lives during the managed float.
Discussion Paper Nr. 819
September 2008
Barbara Praetorius, Katja Schumacher
Greenhouse Gas Mitigation in a Carbon Constrained World:
The Role of Carbon Capture and Storage
In a carbon constrained world, at least four classes of greenhouse gas mitigation options are avail-
able: Energy efficiency, fuel switching, introduction of carbon dioxide capture and storage along
with renewable generating technologies, and reductions in emissions of non-CO2 greenhouse
gases. The role of energy technologies is considered crucial in climate change mitigation. In par-
ticular, carbon capture and storage (CCS) promises to allow for low-emissions fossil-fuel based
power generation. The technology is under development; a number of technological, economic,
environmental and safety issues remain to be solved. With regard to its sustainability impact, CCS
raises a number of questions: On the one hand, CCS may prolong the prevailing coal-to-electricity
regime and countervail efforts in other mitigation categories. On the other hand, given the indis-
putable need to continue using fossil fuels for some time, it may serve as a bridging technology
towards a sustainable energy future. In this paper, we discuss the relevant issues for the case of
Germany. We provide a survey of the current state of the art of CCS and activities, and perform
an energy-environment-economic analysis using a general equilibrium model for Germany. The
model analyzes the impact of introducing carbon constraints with respect to the deployment of
CCS, to the resulting greenhouse gas emissions, to the energy and technology mix and with re-
spect to interaction of different mitigation efforts. The results show the relative importance of the
components in mitigating greenhouse gas emissions in Germany. For example, under the assump-
tion of a CO2 policy, both energy efficiency and CCS will contribute to climate gas mitigation. A
given climate target can be achieved at lower marginal costs when the option of CCS is included.
We conclude that, given an appropriate legal and policy framework, CCS, energy efficiency and
some other mitigation efforts are complementary measures and should form part of a broad mix
of measures required for a successful CO2 mitigation strategy.
Discussion Paper Nr. 820
September 2008
Wochenbericht des DIW Berlin Nr. 41/2008
663