Uncovered interest parity, forward guidance and the exchange rate

Galí, Jordi, 1961-

doi:http://dx.doi.org/10.1111/jmcb.12759

Uncovered interest parity, forward guidance and the exchange rate

Citation

Galí J. Uncovered interest parity, forward guidance and the exchange rate. Journal of Money, Credit and Banking. 2021 Feb 5;52(52):465-96. DOI: 10.1111/jmcb.12759

Abstract

Under uncovered interest parity (UIP), the size of the effect on the real exchange rate of an anticipated change in real interest rate differentials is invariant to the horizon at which the change is expected. Empirical evidence using U.S., euro area and UK data points to a substantial deviation from that invariance prediction: expectations of interest rate differentials in the near (distant) future are shown to have much larger (smaller) effects on the real exchange rate than is implied by UIP. Some possible explanations are discussed.