Covered Interest Parity, Uncovered Interest Parity, and Exchange Rate Dynamics / Jonathan Eaton, Stephen J. Turnovsky.

Format:

Book

Author/Creator:

Eaton, Jonathan.

Contributor:

National Bureau of Economic Research.

Turnovsky, Stephen J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w0984.

NBER working paper series no. w0984

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1982.

Summary:

A number of macroeconomic models of open economies under flexible exchange rate assume a strong version of perfect capital mobility which implies that currency speculation commands no risk premium. If this assumption is dropped a number of important results no longer obtain. First, the exchange rate and interest rate cannot be in steady state unless both the government deficit and current account equal zero, not simply their sum, as would otherwise be the case. Second, even in steady state the domestic interest rate can deviate from the foreign interest rate by an amount which de ends upon relative domestic asset supplies. Finally, introducing risk aversion on the part of speculators can reduce the response on impact of the exchange rate to changes in domestic asset supplies. In this sense rational speculators, if they are less risk averse than other agents, can destabilize exchange markets.

Notes:

Print version record

September 1982.