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Deciphering Dollar Exchange Rates and Interest Parity

Author

Listed:
  • Yang Yang

    (School of Finance, Zhongnan University of Economics and Law)

  • Ren Zhang

    (Department of Finance & Economics, Texas State University)

  • Shuwei Zhang

    (Department of Economics, Towson University)

Abstract

This paper explores exchange rate dynamics and the uncovered interest parity (UIP) violation in the context of multiple shocks. Our key contribution lies in reveal- ing that exchange rate dynamics emanate from the collective influence of different shocks, in contrast to prevailing literature emphasizing the dominance of a single shock. While verifying the unconditional UIP reversals, we are the ï¬ rst to show that there is no signiï¬ cant evidence of conditional UIP reversal with an innovative test method developed in this paper. Additionally, through rigorous mathematical proof, we establish that conditional UIP reversal is not a prerequisite for unconditional UIP reversal in models featuring a moving averaging representation. This insight relaxes stringent prerequisites in earlier theoretical studies, offering broad applicability for understanding reversal patterns in UIP and other asset returns.

Suggested Citation

  • Yang Yang & Ren Zhang & Shuwei Zhang, 2024. "Deciphering Dollar Exchange Rates and Interest Parity," Working Papers 2024-04, Towson University, Department of Economics, revised Mar 2024.
    • Handle: RePEc:tow:wpaper:2024-04
    as

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    File URL: http://webapps.towson.edu/cbe/economics/workingpapers/2024-04.pdf
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    References listed on IDEAS

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    Cited by:

    1. Karau, Sören, 2024. "Relative monetary policy and exchange rates," Discussion Papers 40/2024, Deutsche Bundesbank.

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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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