Uncovered Interest Parity and Monetary Policy Near and Far from the Zero Lower Bound / Menzie D. Chinn, Yi Zhang.

Format:

Book

Author/Creator:

Chinn, Menzie D.

Contributor:

National Bureau of Economic Research.

Zhang, Yi.

Series:

Working Paper Series (National Bureau of Economic Research) no. w21159.

NBER working paper series no. w21159

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2015.

Summary:

Relying upon a standard New Keynesian DSGE, we 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, we 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 we attribute to the interaction of the monetary reaction function and the zero lower bound.

Notes:

Print version record

May 2015.