NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Uncovered Interest Parity and Monetary Policy Near and Far from the Zero Lower Bound

Menzie D. Chinn, Yi Zhang

NBER Working Paper No. 21159
Issued in May 2015, Revised in May 2015
NBER Program(s):International Finance and Macroeconomics

Relying upon a standard New Keynesian DSGE, we propose an explanation for two empirical findings in the international finance literature. First, the unbiasedness hypothesis – the proposition that expost exchange rate depreciation matches interest differentials – is rejected much more strongly at short horizons than at long. Second, even at long horizons, the unbiasedness hypothesis tends to be rejected when one of the currencies has experienced a long period of low interest rates, such as in Japan and Switzerland. Using a calibrated New Keynesian dynamic stochastic general equilibrium model, we show how a monetary policy rule can induce the negative (positive) correlation between depreciation and interest differentials at short (long) horizons. The tendency to reject unbiasedness for Japan and Switzerland even at long horizons we attribute to the interaction of the monetary reaction function and the zero lower bound.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w21159

Users who downloaded this paper also downloaded* these:
Rey w21162 Dilemma not Trilemma: The global Financial Cycle and Monetary Policy Independence
Bacchetta, Perazzi, and van Wincoop w21158 Self-Fulfilling Debt Crises: Can Monetary Policy Really Help?
Engel w21042 Exchange Rates, Interest Rates, and the Risk Premium
Engel w19336 Exchange Rates and Interest Parity
Chinn and Quayyum w18482 Long Horizon Uncovered Interest Parity Re-Assessed
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us