Uncovered Interest Parity, Forward Guidance and the Exchange Rate

39 Pages Posted: 16 Jun 2020

See all articles by Jordi Galí

Jordi Galí

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2020

Abstract

Under uncovered interest parity (UIP), the size of the effect on the real exchange rate of an anticipated change in real interest rate differentials is invariant to the horizon at which the change is expected. Empirical evidence using US, euro area and UK data points to a substantial deviation from that invariance prediction: expectations of interest rate differentials in the near (distant) future are shown to have much larger (smaller) effects on the real exchange rate than is implied by UIP. Some possible explanations are discussed.

Keywords: forward guidance puzzle, open economy New Keynesian model, unconventional monetary policies, uncovered interest rate parity

JEL Classification: E43, E58, F41

Suggested Citation

Gali, Jordi, Uncovered Interest Parity, Forward Guidance and the Exchange Rate (June 2020). CEPR Discussion Paper No. DP14889, Available at SSRN: https://ssrn.com/abstract=3628211

Jordi Gali (Contact Author)

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

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Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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