Download or read book Monetary policy and the uncovered interest parity puzzle written by David Backus and published by . This book was released on 2010 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: High interest rate currencies tend to appreciate. This is the uncovered interest rate parity (UIP) puzzle. It is primarily a statement about short-term interest rates and how they are related to exchange rates. Short-term interest rates are strongly affected by monetary policy. The UIP puzzle, therefore, can be restated in terms of monetary policy. Do foreign and domestic monetary policies imply exchange rates that violate UIP? We represent monetary policy as foreign and domestic Taylor rules. Foreign and domestic pricing kernels determine the relationship between these Taylor rules and exchange rates. We examine different specifications for the Taylor rule and ask which can resolve the UIP puzzle. We find evidence in favor of a particular asymmetry. If the foreign Taylor rule responds to exchange rate variation but the domestic Taylor rule does not, the model performs better. A calibrated version of our model is consistent with many empirical observations on real and nominal exchange rates, including Fama's negative correlation between interest rate differentials and currency depreciation rates.
Download or read book Monetary Policy and the Ucovered Interest Parity Puzzle written by David K. Backus and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Exchange Rate Economics written by Norman C. Miller and published by Edward Elgar Publishing. This book was released on 2014-09-26 with total page 217 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Uncovered Interest Parity (UIP) puzzle has remained a moot point since it first circulated economic discourse in 1984 and, despite a number of attempts at a solution, the UIP puzzle and other anomalies in Exchange Rate Economics continue to perplex
Download or read book Monetary Policy and the Uncovered Interest Rate Parity Puzzle written by Alfred Guender and published by . This book was released on 2014 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This article offers a theory-based explanation for why high- interest-rate countries see their currencies appreciate, the so-called UIP puzzle. The central bank bases its target rule on the lag of the policy instrument and the CPI inflation rate. When combined with a stylised model of an open economy, the endogenous target rule can account for the systematic negative relation between the change in the exchange rate and the lagged interest rate differential. Foreign inflation and the foreign interest rate also affect nominal exchange rate changes. The model-based behaviour of the exchange rate is tested on New Zealand and Australian data with mixed results.
Download or read book International Evidence on the Role of Monetary Policy in the Uncovered Interest Rate Parity Puzzle written by Alfred V. Guender and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Uncovered Interest Parity Puzzle Exchange Rate Forecasting and Taylor Rules written by Charles Engel and published by . This book was released on 2017 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent research has found that the Taylor-rule fundamentals have power to forecast changes in U.S. dollar exchange rates out of sample. Our work casts some doubt on that claim. However, we find strong evidence of a related in-sample anomaly. When we include U.S. inflation in the well-known uncovered interest parity regression of the change in the exchange rate on the interest-rate differential, we find that the inflation variable is highly significant and the interest-rate differential is not. Specifically, high U.S. inflation in one month forecasts dollar appreciation in the subsequent month. We introduce a model in which a Taylor rule determines monetary policy, but in which not only monetary shocks but also liquidity shocks drive nominal interest rates. This model can potentially account for the empirical findings.
Download or read book Nonlinearity in Deviations from Uncovered Interest Parity An Explanation of the Forward Bias Puzzle written by Lucio Sarno and published by International Monetary Fund. This book was released on 2006-05 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide empirical evidence that deviations from uncovered interest rate parity (UIP) display significant nonlinearities, consistent with theories based on transaction costs or limits to speculation. This evidence suggests that the forward bias documented in the literature may be less indicative of major market inefficiencies than previously thought. Monte Carlo experiments allow us to reconcile these results with the large empirical literature on the forward bias puzzle since we show that, if the true process of UIP deviations were of the nonlinear form we consider, estimation of conventional spot-forward regressions would generate the anomalies documented in previous research.
Download or read book Systematic Monetary Policy and the Forward Premium Puzzle written by Demosthenes N. Tambakis and published by . This book was released on 2014 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: Is systematic monetary policy a driver of the forward premium puzzle, i.e. the tendency of high interest-rate currencies to appreciate, thus strongly violating Uncovered Interest Parity (UIP)? We address this question by studying a battery of monetary policy rules in a small open economy that is subject to stationary but persistent domestic and foreign shocks. Each rule leads to model-implied UIP violations, which we derive analytically and then calibrate numerically. Our key finding is that only a forward-looking rule based on CPI inflation can account for frequently observed strong UIP violations.
Download or read book Uncovered Interest Parity written by Mr.Peter Isard and published by International Monetary Fund. This book was released on 1991-05 with total page 14 pages. Available in PDF, EPUB and Kindle. Book excerpt: This note provides an overview of the uncovered interest parity assumption. It traces the history of the interest parity concept, summarizes evidence on the empirical validity of uncovered interest parity, and discusses the implications for macroeconomic analysis. The uncovered interest parity assumption has been an important building block in multiperiod and continuous time models of open economies, and although its validity is strongly challenged by the empirical evidence, its retention in macroeconomic models is supported on pragmatic grounds, at least for the time being, by the lack of much empirical support for existing models of the exchange risk premium.
Download or read book The Forward Premium Puzzle Revisited written by Guy Meredith and published by International Monetary Fund. This book was released on 2002-02 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: The forward premium is a notoriously poor predictor of exchange rate movements. This failure must reflect deviations from risk neutrality and/or rational expectations. In addition, a mechanism is needed that generates the appropriate correlation between the forward premium and shocks arising from risk premia or expectations errors. This paper extends McCallum (1994) to show how such a correlation can arise from the response of monetary policy to output and inflation, which are in turn affected by the exchange rate. The theoretical models considered all generate results that are consistent with the forward premium being a biased predictor of short-term exchange rate movements; the bias decreases, however, as the horizon of the exchange rate change lengthens. Another common feature of the models is that the true reduced-form equation for exchange rate changes contains variables other than the interest differential, providing a justification for "eclectic" relationships for forecasting exchange rates. The results, however, remain consistent with using uncovered interest parity as a building block for structural models.
Download or read book Covered Interest Parity Deviations Macrofinancial Determinants written by Mr.Eugenio M Cerutti and published by International Monetary Fund. This book was released on 2019-01-16 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: For about three decades until the Global Financial Crisis (GFC), Covered Interest Parity (CIP) appeared to hold quite closely—even as a broad macroeconomic relationship applying to daily or weekly data. Not only have CIP deviations significantly increased since the GFC, but potential macrofinancial drivers of the variation in CIP deviations have also become significant. The variation in CIP deviations seems to be associated with multiple factors, not only regulatory changes. Most of these do not display a uniform importance across currency pairs and time, and some are associated with possible temporary considerations (such as asynchronous monetary policy cycles).
Download or read book Sytematic Monetary Policy and the Forward Premium Puzzle written by Demosthenes N. Tambakis and published by . This book was released on 2012 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: Is systematic monetary policy a driver of the forward premium puzzle, i.e., the tendency of high interest-rate currencies to appreciate, thus strongly violating Uncovered Interest Parity (UIP)? We address this question by studying a battery of monetary policy rules in a small open economy that is subject to stationary but persistent domestic and foreign shocks. Each rule leads to model-implied UIP violations, which we derive analytically and then calibrate numerically. Our key finding is that only a forward-looking rule based on CPI inflation can account for frequently observed strong UIP violations.
Download or read book Monetary Policy and Exchange Rate Dynamics in a Behavioral Open Economy Model written by Marcin Kolasa and published by International Monetary Fund. This book was released on 2022-06-03 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop an extension of the open economy New Keynesian model in which agents are boundedly rational à la Gabaix (2020). Our setup nests rational expectations (RE) as a special case and it can successfully mitigate many “puzzling” aspects of the relationship between exchange rates and interest rates. Since the model implies an uncovered interest rate parity (UIP) condition featuring behavioral expectations, our results are also consistent with recent empirical evidence showing that several UIP puzzles vanish when actual exchange rate expectations are used (instead of realizations implicitly coupled with the RE assumption). We find that cognitive discounting dampens the effects of current monetary shocks and lowers the efficacy of forward guidance (FG), but its relative importance in mitigating the so-called FG puzzle is decreasing in openness. Finally, we show that accounting for myopia exacerbates the small open economy unit-root problem, makes positive monetary spillovers more likely, and increases the persistence of net foreign assets and the real exchange rate.
Download or read book Handbook of Exchange Rates written by Jessica James and published by John Wiley & Sons. This book was released on 2012-05-29 with total page 674 pages. Available in PDF, EPUB and Kindle. Book excerpt: Praise for Handbook of Exchange Rates “This book is remarkable. I expect it to become the anchor reference for people working in the foreign exchange field.” —Richard K. Lyons, Dean and Professor of Finance, Haas School of Business, University of California Berkeley “It is quite easily the most wide ranging treaty of expertise on the forex market I have ever come across. I will be keeping a copy close to my fingertips.” —Jim O’Neill, Chairman, Goldman Sachs Asset Management How should we evaluate the forecasting power of models? What are appropriate loss functions for major market participants? Is the exchange rate the only means of adjustment? Handbook of Exchange Rates answers these questions and many more, equipping readers with the relevant concepts and policies for working in today’s international economic climate. Featuring contributions written by leading specialists from the global financial arena, this handbook provides a collection of original ideas on foreign exchange (FX) rates in four succinct sections: • Overview introduces the history of the FX market and exchange rate regimes, discussing key instruments in the trading environment as well as macro and micro approaches to FX determination. • Exchange Rate Models and Methods focuses on forecasting exchange rates, featuring methodological contributions on the statistical methods for evaluating forecast performance, parity relationships, fair value models, and flow–based models. • FX Markets and Products outlines active currency management, currency hedging, hedge accounting; high frequency and algorithmic trading in FX; and FX strategy-based products. • FX Markets and Policy explores the current policies in place in global markets and presents a framework for analyzing financial crises. Throughout the book, topics are explored in-depth alongside their founding principles. Each chapter uses real-world examples from the financial industry and concludes with a summary that outlines key points and concepts. Handbook of Exchange Rates is an essential reference for fund managers and investors as well as practitioners and researchers working in finance, banking, business, and econometrics. The book also serves as a valuable supplement for courses on economics, business, and international finance at the upper-undergraduate and graduate levels.
Download or read book Exchange Rate Economics written by Ronald MacDonald and published by Routledge. This book was released on 2005 with total page 334 pages. Available in PDF, EPUB and Kindle. Book excerpt: ''In summary, the book is valuable as a textbook both at the advanced undergraduate level and at the graduate level. It is also very useful for the economist who wants to be brought up-to-date on theoretical and empirical research on exchange rate behaviour.'' ""Journal of International Economics""
Download or read book Changing Monetary Policy Rules Learning and Real Exchange Rate Dynamics written by Nelson Chung Mark and published by . This book was released on 2005 with total page 26 pages. Available in PDF, EPUB and Kindle. Book excerpt: "When central banks set nominal interest rates according to an interest rate reaction function, such as the Taylor rule, and the exchange rate is priced by uncovered interest parity, the real exchange rate is determined by expected inflation differentials and output gap differentials. In this paper I examine the implications of these Taylor-rule fundamentals for real exchange rate determination in an environment where market participants are ignorant of the numerical values of the model's coefficients but attempt to acquire that information using least-squares learning rules. I find evidence that this simple learning environment provides a plausible framework for understanding real dollar--DM exchange rate dynamics from 1976 to 2003. The least-squares learning path for the real exchange rate implied by inflation and output gap data exhibits the real depreciation of the 70s, the great appreciation (1979.4-1985.1) and the subsequent great depreciation (1985.2-1991.1) observed in the data. An emphasis on Taylor-rule fundamentals may provide a resolution to the exchange rate disconnect puzzle"--National Bureau of Economic Research web site.
Download or read book Uncovered Interest Parity and Carry Trades written by Torsten Abendroth and published by GRIN Verlag. This book was released on 2017-01-18 with total page 66 pages. Available in PDF, EPUB and Kindle. Book excerpt: Master's Thesis from the year 2016 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,0, University of Frankfurt (Main) (Goethe Business School), language: English, abstract: The aim of this thesis is to test UIP by implementing an OLS regression analysis for five currency pairs which, according to CFTC data, global turnover data and carry-to-risk ratios, were among the most popular in the investor community. To increase the significance of this thesis for practitioners, the work will use one-month forward contracts which are used frequently by investors and include bid and ask rates in order to account for transaction costs. In addition, all currency pairs include the US Dollar for reasons of better liquidity, and therefore tighter bid-ask spreads. Moreover, this thesis will present recent findings in literature which try to explain deviations from UIP. Approaches can be separated by the focus on a risk premium, by irrational market behavior or by learning problems and market inefficiency. While most focus is laid on an explanation by a risk premium, it will be shown that it is crucial to combine the different scientific disciplines in order to solve the forward premium puzzle. In addition to this, the thesis will provide an outlook on the future attractiveness of carry trade strategies.
