Uncovered Interest Parity, Forward Guidance, and the Exchange Rate

Jordi Galí Y

15 citations0/0 files storedNational Bureau of Economic Research

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Global Financial Crisis and Policies

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.

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References

2003Zero Bound on Interest Rates and Optimal Monetary Policy 2005Monetary Policy and Exchange Rate Volatility in a Small Open Economy 1980Exchange Rates and the Current Account.2005Exchange Rates and Fundamentals 2004Exchange Rates and Fundamentals 2013Pricing the term structure with linear regressions 2016The Power of Forward Guidance Revisited 2005Monetary Policy and Exchange Rate Volatility in a Small Open Economy

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2020Monetary Policy Surprises and Exchange Rate Behavior

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