Nominal Exchange Rate Stationarity and Long-Term Bond Returns

We derive a novel test for nominal exchange rate stationarity that exploits the forward-looking information in long maturity bond prices. When nominal exchange rates are stationary, no arbitrage implies that the return on the foreign long bond expressed in dollars is identical to the return on the U.S. bond. In the data, we do not find significant differences in long-term government bond risk premia in dollars across G10 countries, contrary to the large differences in risk premia at short maturities documented in the FX carry trade literature. Moreover, in most of the cases examined, we cannot reject that realized foreign and domestic long-term bond returns in dollars are the same, as if nominal exchange rates were stationary in levels, contrary to the academic consensus.