The Uncovered Interest Parity Puzzle, Exchange Rate Forecasting, and Taylor Rules

Engel, Charles; Lee, Dohyeon; Liu, Chang; Liu, Chenxin; Wu, Steve Pak Yeung

doi:10.3386/w24059

Cited by 16 publications

(22 citation statements)

References 0 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Similar to Engel et al . (), the source of the shock that causes movements in inflation determines whether the exchange rate appreciates or depreciates.…”

Section: Theoretical Frameworkmentioning

confidence: 99%

“…Engel et al . () find that including inflation in a UIP regression renders the coefficient on the interest rate differential insignificant, while high inflation leads to a subsequent appreciation of the currency. They show in a theoretical model that including liquidity shocks, in addition to monetary policy shocks, can account for this pattern.…”

Section: Introductionmentioning

confidence: 95%

“…Engel and West () and Engel et al . () therefore examine the in‐sample explanatory power of fundamentals using variables typically included in Taylor‐type policy rules. In this paper, we examine whether taking into account slow‐moving trends—such as changes in the inflation target or the natural rate of unemployment—improves the in‐sample explanatory power of exchange rate models.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Trend Fundamentals and Exchange Rate Dynamics

Huber

Kaufmann

2020

Economica

View full text Add to dashboard Cite

We estimate a multivariate unobserved components stochastic volatility model to explain the dynamics of a panel of six exchange rates against the US dollar. The empirical model is based on the assumption that two countries’ monetary policy strategies may be well described by Taylor rules with a time‐varying inflation target, a time‐varying natural rate of unemployment, and interest rate smoothing. Compared to the existing literature, our model simultaneously provides estimates of the latent components included in a typical Taylor rule specification and the model‐based real exchange rate. Our estimates closely track major movements along with important time series properties of real and nominal exchange rates across all currencies considered, outperforming a benchmark model that does not account for changes in trend inflation and trend unemployment. More precisely, the proposed approach improves on competing models in tracking the actual evolution of the real exchange rate in terms of simple correlations while it appreciably improves on simpler competitors in terms of matching the persistence of the real exchange rate.

show abstract

“…Similar to Engel et al . (), the source of the shock that causes movements in inflation determines whether the exchange rate appreciates or depreciates.…”

Section: Theoretical Frameworkmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 95%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Trend Fundamentals and Exchange Rate Dynamics

Huber

Kaufmann

2020

Economica

View full text Add to dashboard Cite

show abstract

“…Assuming that the fundamental exchange rate s * t is given by UIP, the change in the log of the exchange rate is determined by the interest rate differential [75],…”

Section: Hypothesis and Derivation Of The Modelmentioning

confidence: 99%

Exploring Carry Trade and Exchange Rate toward Sustainable Financial Resources: An application of the Artificial Intelligence UKF Method

Zhang

Tseng

2019

Sustainability

View full text Add to dashboard Cite

This paper constructs a heterogeneous agent model for the foreign exchange market that is based on the law of supply and demand and includes carry trade, central bank intervention, and macroeconomic fundamentals. With the artificial intelligence method of the unscented Kalman filter, this paper investigates carry traders’ expectation formation and risk aversion and the impact of their activities on the movement of the Chinese yuan exchange rate and on the efficiency of central bank intervention. The findings demonstrate that carry traders’ activities are partially responsible for fluctuations in the Chinese yuan exchange rate; carry traders behave with obvious risk aversion; their activities tend to weaken the ability of the central bank to intervene in China’s foreign exchange market; and the volatility of the Chinese yuan exchange rate and the weight of carry traders are negatively related. Based on these empirical results, specific suggestions for exploring sustainable financial resources are provided.

show abstract

“…We then ran a robustness exercise, in the spirit of Fama (1984), and also used in some recent papers [Cerutti et al (2019), Engel et al (2019)], consisting in split the CIP between the Forward Premium (FP) and the Interest Rates Differential (IRD) to estimate equations like Equation 2-3 bellow 3 .…”

Section: Artificial Counterfactual (Arco)mentioning

confidence: 99%

Foreign Exchange Interventions and Covered Interest Parity Deviations

DOINE¹

View full text Add to dashboard Cite

Several people are involved in the process of elaborating on this thesis, and each one has a unique contribution. First of all, I would like to thanks my advisor Prof. Márcio Garcia, for the excellent guidance, friendship, and advice, which were very important in my formation. I also thank Prof. Marcelo Medeiros and Marcos Chamon for important comments, suggestions, and insights. During my time at PUC, I appreciated the classes of the professors Marcelo Medeiros, Fábio Miessi, Ruy Ribeiro, Eduardo Zilberman, and Marcelo de Paiva Abreu. It was a privilege to spend some time listening and absorbing part of your knowledge. This project would not be possible without the support of my family, my parents Mauro and Rita, my sister Sofia, and my grandparents, Mauro and Maria. Finally, I am very grateful to all my friends and my classmates. My period in Rio would not be the same without your friendship. This study was partially financed by the Coordenação de Aperfeiçoamento Pessoal de Nível Superior-Brasil (CAPES)-Código de Financiamento 001. I also thanks the CNPq for the financial support.

show abstract

The Uncovered Interest Parity Puzzle, Exchange Rate Forecasting, and Taylor Rules

Cited by 16 publications

References 0 publications

Trend Fundamentals and Exchange Rate Dynamics

Trend Fundamentals and Exchange Rate Dynamics

Exploring Carry Trade and Exchange Rate toward Sustainable Financial Resources: An application of the Artificial Intelligence UKF Method

Foreign Exchange Interventions and Covered Interest Parity Deviations

Contact Info

Product

Resources

About