Monetary Policy and the Uncovered Interest Rate Parity Puzzle

The Changing Performance of the Uncovered Interest Rate Parity Hypothesis and Monetary Policy

This paper test for multiple unknown breaks in UIP regressions for seven major currencies and the years 1980-98. For periods of EMS turbulence and crises we observe a switch from the “usual” negatively signed OLS slope coefficient to high positive values. This result can be nicely explained in the framework of McCallum’s (1994) monetary policy reaction model as a consequence of a decrease in th...

Testing Uncovered Interest Rate Parity Using LIBOR

We test Uncovered Interest Parity (UIP) using LIBOR interest rates for a wide range of maturities. In contrast to other markets, LIBOR markets have minimal frictions which could lead to rejecting UIP. Using panel unit root test suggested by Palm, Smeekes, and Urbain (2010) and cointegration techniques by Westerlund (2007), we find that UIP holds for shortterm maturities, when market-specific he...

The Uncovered Interest Rate Parity Puzzle in the Foreign Exchange Market

This paper focuses on the theory of uncovered interest rate parity and whether interest-rate differentials have resulted in the higher interest rate currency depreciating over time. Previous literature has empirically rejected the theory indicating that higher interest rate currencies have actually appreciated relative to lower interest rate currencies. In this paper, uncovered interest rate pa...

Global Knowledge, Local Solutions: Interest Rate and Monetary Policy

Uncovered Interest Rate Parity and the Term Structure

This paper examines uncovered interest rate parity (UIRP) and the expectations hypotheses of the term structure (EHTS) at both short and long horizons. The statistical evidence against UIRP is mixed and is currencynot horizon-dependent. Economically, the deviations from UIRP are less pronounced than previously documented. The evidence against the EHTS is statistically more uniform, but, economi...