NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Long-Horizon Uncovered Interest Rate Parity

Guy Meredith, Menzie D. Chinn

NBER Working Paper No. 6797
Issued in November 1998
NBER Program(s):   IFM

Uncovered interest parity (UIP) has been almost universally rejected in studies of exchange rate movements, although there is little consensus on why it fails. In contrast to previous studies, which have used relatively short-horizon data, we test UIP using interest rates on longer-maturity bonds for the G-7 countries. These long-horizon regressions yield much more support for UIP -- all the coefficients on interest differentials are of the correct sign, and almost all are closer to the UIP value of unity than to the zero coefficient implied by the random walk hypothesis. We then use a small macroeconomic model to explain the differences between the short- and long-horizon results. Regressions run on data generated by stochastic simulations replicate the important regularities in the actual data, including the sharp differences between short- and long-horizon parameters. In the short run from risk premium shocks in the face of endogenous monetary policy. In the long run, in contrast, exchange rate movements are driven by the "fundamentals," leading to a relationship between interest rates and exchange rates that is more consistent with UIP.

download in pdf format
   (1119 K)

email paper

This paper is available as PDF (1119 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6797

Published: Meredith, Guy and Menzie D. Chinn. “Monetary Policy and Long Horizon Uncovered Interest Parity." IMF Staff Papers 51, 3 (November 2004): 409-430.

Users who downloaded this paper also downloaded these:
Backus, Gavazzoni, Telmer, and Zin w16218 Monetary Policy and the Uncovered Interest Parity Puzzle
Bekaert, Wei, and Xing w8795 Uncovered Interest Rate Parity and the Term Structure
Cumby and Obstfeld w0921 International Interest-Rate and Price-Level Linkages Under Flexible Exchange Rates: A Review of Recent Evidence
McCallum w4113 A Reconsideration of the Uncovered Interest Parity Relationship
Chinn and Meredith w11077 Testing Uncovered Interest Parity at Short and Long Horizons during the Post-Bretton Woods Era
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

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

Contact Us