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The Simultaneity Bias of the Uncovered Interest Rate Parity: Evidence for Brazil

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  • Alex Luiz Ferreira

Abstract

We test ex ante uncovered interest parity (UIP) for Brazil using survey data of ex- change rate expectations from the Brazilian Central Bank. Using data from 2001M11 until 2007M12 and Ordinary Least Squares, we found that the estimated UIP parameter is smaller than one, which is a common ¯nding. We then develop a model that explains how a negative bias can arise due to the simultaneous actions between the Central Bank and speculators. Our results, using Instrumental Variables, show that the bias can be re- duced, and lend support to ex ante UIP. The reduced form, dynamically complete model provides the best ¯t for expected exchange rate changes, as it aims to represent the data generation process of the observed data, in contrast to the single structural equation.

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Bibliographic Info

Paper provided by Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto in its series Working Papers with number 08_20.

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Date of creation: 2008
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Handle: RePEc:fea:wpaper:08_20

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Related research

Keywords: Uncovered Interest Rate Parity; Simultaneity;

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  1. Favero, Carlo A & Giavazzi, Francesco, 2004. "Inflation Targeting and Debt: Lessons from Brazil," CEPR Discussion Papers 4376, C.E.P.R. Discussion Papers.
  2. Guy Meredith & Menzie D. Chinn, 1998. "Long-Horizon Uncovered Interest Rate Parity," NBER Working Papers 6797, National Bureau of Economic Research, Inc.
  3. Alexius, Annika, 2002. "Can Endogenous Monetary Policy Explain the Deviations from UIP," Working Paper Series 2002:17, Uppsala University, Department of Economics.
  4. Bennett T. McCallum, 1994. "A Reconsideration of the Uncovered Interest Parity Relationship," NBER Working Papers 4113, National Bureau of Economic Research, Inc.
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