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Deviations from uncovered interest rate parity: a Post Keynesian explanation

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  • JOHN T. HARVEY

Abstract

Finding satisfactory explanations of deviations from uncovered interest rate parity (UIRP) has proved to be a frustrating experience for Neoclassical economists. Studies have focused on the role of risk, but thus far no one has been able to put forward a source thereof that can account for the specific pattern of deviations from UIRP. This paper offers an alternative perspective that finally resolves the mystery. Drawing on the work of Marc Lavoie and John Smithin and extending it with some basic Post Keynesian propositions regarding endogenous money, uncertainty, and nonergodicity, it is shown that one can devise a comprehensive explanation of UIRP--an explanation that shows that much more than risk is responsible for deviations. In particular, it is argued that Keynes's "confidence" is a vitally important and overlooked factor. This contention is supported by a regression analysis of the U.S.-German and U.S.- Japanese asset markets.

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Bibliographic Info

Article provided by M.E. Sharpe, Inc. in its journal Journal of Post Keynesian Economics.

Volume (Year): 27 (2004)
Issue (Month): 1 (October)
Pages: 19-35

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Handle: RePEc:mes:postke:v:27:y:2004:i:1:p:19-35

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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=109348

Related research

Keywords: confidence; exchange rate; interest rate parity; risk;

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References

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  1. Marc Lavoie, 2000. "A Post Keynesian View of Interest Parity Theorems," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 23(1), pages 163-179, October.
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Citations

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Cited by:
  1. Muhammad Omer & Jakob de Haan & Bert Scholtens, 2012. "Testing Uncovered Interest Rate Parity Using LIBOR," CESifo Working Paper Series 3839, CESifo Group Munich.
  2. John Harvey, 2009. "Currency Market Participants' Mental Model and the Collapse of the Dollar: 2001-2008," Working Papers 200901, Texas Christian University, Department of Economics.
  3. Erdemlioglu, Deniz M, 2007. "A new Test of Uncovered Interest Rate Parity: Evidence from Turkey," MPRA Paper 10787, University Library of Munich, Germany.
  4. Omer, Muhammad & de Haan, Jakob & Scholtens, Bert, 2013. "Does Uncovered Interest rate Parity Hold After All?," MPRA Paper 47572, University Library of Munich, Germany.
  5. John Harvey, 2005. "Modeling Interest Rate Parity: A System Dynamics Approach," Working Papers 200502, Texas Christian University, Department of Economics.

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