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Author: Menzie David Chinn
Publisher:
ISBN:
Category : Economics
Languages : en
Pages :
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Book Description
We review the evidence for both short and long horizon uncovered interest parity (UIP) and rational expectations over the period up to 2011, extending the sample examined in Chinn and Meredith (2004) by nearly a decade. We find that the joint hypothesis of UIP and rational expectations (known as the unbiasedness hypothesis) holds better at long horizons than at short, although the effect is somewhat weaker than documented in Chinn and Meredith (2004). Using the formula for the slope coefficient, we identify potential sources for the difference in slope coefficients at different horizons. We attribute our weaker findings for long horizon unbiasedness for certain currencies partly to the advent of extraordinarily low interest rates associated with the zero interest bound in Japan and Switzerland.
Author: Menzie David Chinn
Publisher:
ISBN:
Category : Economics
Languages : en
Pages :
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Book Description
We review the evidence for both short and long horizon uncovered interest parity (UIP) and rational expectations over the period up to 2011, extending the sample examined in Chinn and Meredith (2004) by nearly a decade. We find that the joint hypothesis of UIP and rational expectations (known as the unbiasedness hypothesis) holds better at long horizons than at short, although the effect is somewhat weaker than documented in Chinn and Meredith (2004). Using the formula for the slope coefficient, we identify potential sources for the difference in slope coefficients at different horizons. We attribute our weaker findings for long horizon unbiasedness for certain currencies partly to the advent of extraordinarily low interest rates associated with the zero interest bound in Japan and Switzerland.
Author: Guy Meredith
Publisher:
ISBN:
Category :
Languages : en
Pages : 20
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Book Description
Author: Guy Meredith
Publisher:
ISBN:
Category : Foreign exchange rates
Languages : en
Pages : 50
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Book Description
Uncovered interest parity (UIP) has been almost universally rejected in studies of exchange rate movements, although there is little consensus on why it fails. In contrast to previous studies, which have used relatively short-horizon data, we test UIP using interest rates on longer-maturity bonds for the G-7 countries. These long-horizon regressions yield much more support for UIP -- all the coefficients on interest differentials are of the correct sign, and almost all are closer to the UIP value of unity than to the zero coefficient implied by the random walk hypothesis. We then use a small macroeconomic model to explain the differences between the short- and long-horizon results. Regressions run on data generated by stochastic simulations replicate the important regularities in the actual data, including the sharp differences between short- and long-horizon parameters. In the short run from risk premium shocks in the face of endogenous monetary policy. In the long run, in contrast, exchange rate movements are driven by the "fundamentals," leading to a relationship between interest rates and exchange rates that is more consistent with UIP.
Author: Menzie David Chinn
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Book Description
Author: Arnaud Mehl
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
This paper estimates uncovered interest parity (UIP) at long horizons using bilateral US dollar rates vis-à-vis mature economy and emerging market currencies. The paper finds support in favor of UIP for dollar rates vis-à-vis major mature economy currencies, but far less against emerging market currencies. There are also signs that political risk and the exchange risk premium help explain the empirical failure of UIP for these latter currencies. This suggests that whether UIP holds depends more on the currency than on the horizon.
Author: Haiyan Zhang
Publisher:
ISBN:
Category : Foreign exchange rates
Languages : en
Pages : 152
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Book Description
Author: Menzie David Chinn
Publisher:
ISBN:
Category : Foreign exchange
Languages : en
Pages : 28
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Book Description
"The hypothesis that interest rate differentials are unbiased predictors of future exchange rate movements has been almost universally rejected in empirical studies. In contrast to previous studies, which have used short-horizon data, we test this hypothesis using interest rates on longer-maturity bonds for the U.S., Germany, Japan and Canada. The results of these long-horizon regressions are much more positive--the coefficients on interest differentials are of the correct sign, and most are closer to the predicted value of unity than to zero. These results are robust to the use of different data frequencies, sample periods, yield definitions, and base currencies. We appeal to an econometric interpretation of the results, which focuses on the presence of simultaneity in a cointegration framework"--National Bureau of Economic Research web site.
Author: Mr.Eugenio M Cerutti
Publisher: International Monetary Fund
ISBN: 1484395212
Category : Business & Economics
Languages : en
Pages : 36
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Book Description
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).
Author: Mr.Peter Isard
Publisher: International Monetary Fund
ISBN:
Category : Business & Economics
Languages : en
Pages : 14
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Book Description
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.
Author: Menzie David Chinn
Publisher:
ISBN:
Category : Foreign exchange rates
Languages : en
Pages : 37
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Book Description
Relying upon a standard New Keynesian DSGE, the authors propose an explanation for two empirical findings in the international finance literature. First, the unbiasedness hypothesis - the proposition that expost exchange rate depreciation matches interest differentials - is rejected much more strongly at short horizons than at long. Second, even at long horizons, the unbiasedness hypothesis tends to be rejected when one of the currencies has experienced a long period of low interest rates, such as in Japan and Switzerland. Using a calibrated New Keynesian dynamic stochastic general equilibrium model, the authors show how a monetary policy rule can induce the negative (positive) correlation between depreciation and interest differentials at short (long) horizons. The tendency to reject unbiasedness for Japan and Switzerland even at long horizons they attribute to the interaction of the monetary reaction function and the zero lower bound.
