Uncovering Uncovered Interest Parity During the Classical Gold Standard Era, 1888-1905
Motu Economic and Public Policy Research Trust
May 1, 2010
Motu Economic and Public Policy Research Working Paper No. 10-02
This paper examines the uncovered interest parity hypothesis using the dollar-sterling exchange rate during the gold standard era. This period is interesting because the exchange rate was seasonal, because transactions costs were high, and because occasions when uncovered interest rate speculation did not occur can be identified. The paper shows UIP speculation frequently did not occur, that speculation occurred more in response to expected exchange rate changes than interest rate differentials, and that profitability varied systematically with interest rate differentials. The estimated UIP equations are substantially improved by distinguishing occasions when sterling was borrowed not lent.
Number of Pages in PDF File: 36
Keywords: Uncovered Interest Parity, Gold Standard
JEL Classification: N21, F31
Date posted: June 9, 2010
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