Department of Economics and Business - Universitat Pompeu Fabra

Title:: Uncovered interest parity, forward guidance and the exchange rate
Author:: Jordi Galí
Date:: May 2017 (Revised: February 2020)
Abstract:: Under uncovered interest parity (UIP), the size of the eÂ¤ect on the real exchange rate of an anticipated change in real interest rate diÂ¤erentials 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 diÂ¤erentials in the near (distant) future are shown to have much larger (smaller) eÂ¤ects on the real exchange rate than is implied by UIP. Some possible explanations are discussed.
Keywords:: forward guidance puzzle, uncovered interest rate parity, unconventional monetary policies, open economy New Keynesian model.
JEL codes:: E43, E58, F41,
Area of Research:: Macroeconomics and International Economics
Published in:: Journal of Money, Credit and Banking 52(S2), 465-496.

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