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Long Horizon Uncovered Interest Parity Re-Assessed


  • Menzie D. Chinn
  • Saad Quayyum


We review the evidence for both short and long horizon uncovered interest parity (UIP) and rational expectations over the period up to 2011, extending the sample examined in Chinn and Meredith (2004) by nearly a decade. We find that the joint hypothesis of UIP and rational expectations (known as the unbiasedness hypothesis) holds better at long horizons than at short, although the effect is somewhat weaker than documented in Chinn and Meredith (2004). Using the formula for the slope coefficient, we identify potential sources for the difference in slope coefficients at different horizons. We attribute our weaker findings for long horizon unbiasedness for certain currencies partly to the advent of extraordinarily low interest rates associated with the zero interest bound in Japan and Switzerland.

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  • Menzie D. Chinn & Saad Quayyum, 2012. "Long Horizon Uncovered Interest Parity Re-Assessed," NBER Working Papers 18482, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18482
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    References listed on IDEAS

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    1. Özmen, M. Utku & Yılmaz, Erdal, 2017. "Co-movement of exchange rates with interest rate differential, risk premium and FED policy in “fragile economies”," Emerging Markets Review, Elsevier, vol. 33(C), pages 173-188.
    2. Hale, Galina & Candelaria, Christopher & Caballero, Julian & Borisov, Sergey, 2013. "Bank Linkages and International Trade," Working Paper Series 2013-14, Federal Reserve Bank of San Francisco, revised 11 Feb 2016.
    3. Gokcen Ogruk, 2014. "Is Implied Taylor Rule Interest Rate Applicable as a Carry Trade Strategy?," International Journal of Economics and Financial Issues, Econjournals, vol. 4(4), pages 909-919.
    4. Cheung, Yin-Wong & Chinn, Menzie D. & Garcia Pascual, Antonio & Zhang, Yi, 2017. "Exchange rate prediction redux: new models, new data, new currencies," Working Paper Series 2018, European Central Bank.
    5. Irina Zviadadze, 2014. "Term-structure of consumption risk premia in the cross-section of currency returns," 2014 Meeting Papers 1075, Society for Economic Dynamics.
    6. Justine Pedrono & Aurélien Violon, 2017. "Banks' leverage Procyclicality: Does Currency Diversification Matter?," Working Papers 2017-09, CEPII research center.
    7. repec:eee:reveco:v:49:y:2017:i:c:p:255-265 is not listed on IDEAS
    8. Heipertz, Jonas & Mihov, Ilian & Santacreu, Ana Maria, 2017. "The Exchange Rate as an Instrument of Monetary Policy," Working Papers 2017-28, Federal Reserve Bank of St. Louis.
    9. Balvers, Ronald J. & Klein, Alina F., 2014. "Currency risk premia and uncovered interest parity in the International CAPM," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 214-230.
    10. Maurice Obstfeld, 2015. "Trilemmas and Tradeoffs: Living with Financial Globalization," Central Banking, Analysis, and Economic Policies Book Series,in: Claudio Raddatz & Diego Saravia & Jaume Ventura (ed.), Global Liquidity, Spillovers to Emerging Markets and Policy Responses, edition 1, volume 20, chapter 2, pages 013-078 Central Bank of Chile.
    11. Vasilyev, Dmitry & Busygin, Vladimir & Busygin, Sergei, 2016. "Testing and Interpreting Uncovered Interest Parity in Russia," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 4, pages 35-55, August.
    12. Petra Gerlach-Kristen & Richhild Moessner & Rina Rosenblatt-Wisch, 2017. "Computing long‐term market inflation expectations for countries without inflation expectation markets," Working Papers 2017-09, Swiss National Bank.
    13. Melecky, Ales & Melecky, Martin, 2014. "The Checks of Czechs: Optimizing the Debt Portfolio of the Czech Government," MPRA Paper 57604, University Library of Munich, Germany.

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