NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Chenxin Liu

Department of Economics
University of Wisconsin
1180 Observatory Drive
Madison, WI 53706-1393

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NBER Working Papers and Publications

November 2017The Uncovered Interest Parity Puzzle, Exchange Rate Forecasting, and Taylor Rules
with Charles Engel, Dohyeon Lee, Chang Liu, Steve Pak Yeung Wu: w24059
Recent research has found that the Taylor-rule fundamentals have power to forecast changes in U.S. dollar exchange rates out of sample. Our work casts some doubt on that claim. However, we find strong evidence of a related in-sample anomaly. When we include U.S. inflation in the well-known uncovered interest parity regression of the change in the exchange rate on the interest-rate differential, we find that the inflation variable is highly significant and the interest-rate differential is not. Specifically, high U.S. inflation in one month forecasts dollar appreciation in the subsequent month. We introduce a model in which a Taylor rule determines monetary policy, but in which not only monetary shocks but also liquidity shocks drive nominal interest rates. This model can potentially accoun...
March 2016Fundamentals News, Global Liquidity, and Macroprudential Policy
with Javier Bianchi, Enrique G. Mendoza
in NBER International Seminar on Macroeconomics 2015, Michael B. Devereux, Francesco Giavazzi, and Kenneth D. West, editors
 
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