The determinants of the deviations from the interest rate parity condition
AbstractThis paper shows that the deviation from the uncovered interest parity (UIP) condition is equally large in advanced and emergingmarket economies. Using monthly data, and a GARCH-M model we find that a large share of these deviations in both country groups are explained by time varying risk premium. To more clearly identify risk premium shocks, we then estimate a two country, New Keynesian, DSGE model using a Bayesian methodology and quarterly data. The results suggest that at the quarterly frequency, the large deviations from the UIP condition and the high explanatory power of risk premium is only observed for emerging market economies.
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Bibliographic InfoPaper provided by University of Central Florida, Department of Economics in its series Working Papers with number 2013-03.
Length: 42 Pages
Date of creation: Aug 2013
Date of revision:
Uncovered Interest Rate Parity; Forward Premium Puzzle; Time Varying Risk Premium;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-16 (All new papers)
- NEP-CBA-2013-08-16 (Central Banking)
- NEP-DGE-2013-08-16 (Dynamic General Equilibrium)
- NEP-MAC-2013-08-16 (Macroeconomics)
- NEP-MON-2013-08-16 (Monetary Economics)
- NEP-OPM-2013-08-16 (Open Economy Macroeconomic)
- NEP-SEA-2013-08-16 (South East Asia)
- NEP-SPO-2013-08-16 (Sports & Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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