Deviations from interest rate parity in small open economies: A quantitative-theoretical investigation

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Deviations from interest rate parity in small open economies: A quantitative-theoretical investigation

Author Info

Lorand Ambrus-Lakatos (Central European University)
Balazs Vilagi (Budapest University of Economic Sciences and Public Administration)
Janos Vincze () (Budapest University of Economic Sciences and Public Administration)

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János Vincze

Abstract

It is frequently claimed that the expected yield on emerging market bonds commands a premium. Here we investigate the sources of this phe-nomenon. A stochastic general equilibrium model of a small open economy is analyzed numerically to derive conditions for interest rate premia. The novelty of our approach is to attack the problem form the point of view of state dependent policy mixes. The main lessons include: if positive premia were universal, then 1. nominal rigidity should be important, 2. monetary authorities might have a current account stabilization motive, and 3. taste shocks possibly play some role in emerging markets.

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Paper provided by Institute of Economics, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0403.

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Length: 27 pages
Date of creation: Feb 2004
Date of revision:
Handle: RePEc:has:discpr:0403

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Other versions:
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- Svensson, L.E.O., 1998. "Open-Economy Inflation Targeting," Papers 638, Stockholm - International Economic Studies.
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Other versions:
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Working Paper Series, Macroeconomic Issues WP-96-28, Federal Reserve Bank of Chicago.
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky Price and Limited Participation Models of Money: A Comparison," NBER Working Papers 5804, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Other versions:
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Other versions:
- Obstfeld, M., 1998. "Risk and Exchange Rate," Papers 193, Princeton, Woodrow Wilson School - Public and International Affairs.
Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November. [Downloadable!] (restricted)

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