Deviations from Uncovered Interest Rate Parity: A Post Keynesian Explanation
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.
|Date of creation:||Dec 2003|
|Date of revision:|
|Publication status:||Published in Journal of Post Keynesian Economics, Fall 2004, pages 19-35|
|Contact details of provider:|| Web page: http://www.econ.tcu.edu/|
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Marc Lavoie, 2000. "A Post Keynesian View of Interest Parity Theorems," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 23(1), pages 163-179, October.
- John Smithin, 1994. "Controversies In Monetary Economics," Books, Edward Elgar, number 412, July.
When requesting a correction, please mention this item's handle: RePEc:tcu:wpaper:200301. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (John Harvey)
If references are entirely missing, you can add them using this form.