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Forward Bias, The Failure Of Uncovered Interest Parity And Related Puzzles

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  • Pippenger, John
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    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 explain the related puzzles discussed below. This paper shows how the liquidity effects of open market operations and sterilized “leaning against the wind†can explain the failure of UIP and forward bias even when expectations are rational. They also appear to be able to explain the related puzzles better than any of the alternatives.

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    Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt2ff194s2.

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    Date of creation: 26 Jun 2017
    Handle: RePEc:cdl:ucsbec:qt2ff194s2
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