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Deviations from Uncovered Interest Rate Parity: A Post Keynesian Explanation

Author

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  • John Harvey

    () (Department of Economics, Texas Christian University)

Abstract

Finding satisfactory explanations of deviations from uncovered interest rate parity (UIRP) has proved to be a frustrating experience for Neoclassical economists. Studies have focused on the role of risk, but thus far no one has been able to put forward a source thereof that can account for the specific pattern of deviations from UIRP. This paper offers an alternative perspective that finally resolves the mystery. Drawing on the work of Marc Lavoie and John Smithin and extending it with some basic Post Keynesian propositions regarding endogenous money, uncertainty, and nonergodicity, it is shown that one can devise a comprehensive explanation of UIRP--an explanation that shows that much more than risk is responsible for deviations. In particular, it is argued that Keynes's "confidence" is a vitally important and overlooked factor. This contention is supported by a regression analysis of the U.S.-German and U.S.-Japanese asset markets.

Suggested Citation

  • John Harvey, 2003. "Deviations from Uncovered Interest Rate Parity: A Post Keynesian Explanation," Working Papers 200301, Texas Christian University, Department of Economics.
  • Handle: RePEc:tcu:wpaper:200301
    as

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    File URL: http://www.econ.tcu.edu/RePEc/tcu/wpaper/wp03-01.pdf
    File Function: First version, 2003
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    References listed on IDEAS

    as
    1. Marc Lavoie, 2000. "A Post Keynesian View of Interest Parity Theorems," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 23(1), pages 163-179, September.
    2. John Smithin, 1994. "Controversies In Monetary Economics," Books, Edward Elgar Publishing, number 412.
    3. repec:mes:jeciss:v:31:y:1997:i:2:p:615-622 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. John Harvey, 2005. "Modeling Interest Rate Parity: A System Dynamics Approach," Working Papers 200502, Texas Christian University, Department of Economics.
    2. Omer, Muhammad & de Haan, Jakob & Scholtens, Bert, 2013. "Does Uncovered Interest rate Parity Hold After All?," MPRA Paper 47572, University Library of Munich, Germany.
    3. Muhammad Omer & Jakob de Haan & Bert Scholtens, 2014. "Testing uncovered interest rate parity using LIBOR," Applied Economics, Taylor & Francis Journals, vol. 46(30), pages 3708-3723, October.
    4. Erdemlioglu, Deniz M, 2007. "A new Test of Uncovered Interest Rate Parity: Evidence from Turkey," MPRA Paper 10787, University Library of Munich, Germany.
    5. Carlos Eduardo Castillo-Maldonado & Fidel Pérez-Macal, 2013. "Assessment of models to forecast exchange rates: The quetzal–U.S. dollar exchange rate," Journal of Applied Economics, Universidad del CEMA, vol. 16, pages 71-99, May.
    6. John Harvey, 2009. "Currency Market Participants' Mental Model and the Collapse of the Dollar: 2001-2008," Journal of Economic Issues, Taylor & Francis Journals, vol. 43(4), pages 931-949.
    7. John Harvey, 2007. "Teaching Post Keynesian exchange rate theory," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 30(2), pages 147-168.

    More about this item

    Keywords

    confidence; exchange rate; interest rate parity; risk;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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