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Forward Bias, Uncovered Interest Parity And Related Puzzles

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  • Pippenger, John

Abstract

Uncovered interest parity is widely used in open economy macroeconomics. But the evidence rejects UIP and implies forward bias. There are many suggested explanations for the failure of UIP and forward bias, but none are widely accepted, at least partially because none appear to explain the related puzzles discussed below. This paper shows how sterilized “leaning against the wind” and a combination of inflationary and liquidity effects of open market operations can explain forward bias and the failure of UIP even when expectations are rational. They also appear to be able to explain the related puzzles.

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  • Pippenger, John, 2018. "Forward Bias, Uncovered Interest Parity And Related Puzzles," University of California at Santa Barbara, Economics Working Paper Series qt1778z416, Department of Economics, UC Santa Barbara.
    • Handle: RePEc:cdl:ucsbec:qt1778z416
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    Keywords

    Social and Behavioral Sciences; JEL: E43; E44; F30; F31; G14; G15.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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