Uncovered Interest Parity, Forward Guidance, and the Exchange Rate
Working Paper 26797
DOI 10.3386/w26797
Issue Date
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 US, 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.
Published Versions
JORDI GALí, 2020. "Uncovered Interest Parity, Forward Guidance and the Exchange Rate," Journal of Money, Credit and Banking, vol 52(S2), pages 465-496.