Journal
AMERICAN ECONOMIC REVIEW
Volume 106, Issue 2, Pages 436-474Publisher
AMER ECONOMIC ASSOC
DOI: 10.1257/aer.20121365
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Funding
- Federal Reserve Bank of Dallas
- Federal Reserve Bank of St. Louis
- Federal Reserve Bank of San Francisco
- Federal Reserve Board
- European Central Bank
- Hong Kong Institute for Monetary Research
- Central Bank of Chile
- CREI
- National Science Foundation [0850429, 1226007]
- Direct For Social, Behav & Economic Scie
- Divn Of Social and Economic Sciences [1226007] Funding Source: National Science Foundation
- Divn Of Social and Economic Sciences
- Direct For Social, Behav & Economic Scie [0850429] Funding Source: National Science Foundation
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The uncovered interest parity puzzle concerns the empirical regularity that high interest rate countries tend to have high expected returns on short term deposits. A separate puzzle is that high real interest rate countries tend to have currencies that are stronger than can be accounted for by the path of expected real interest differentials under uncovered interest parity. These two findings have apparently contradictory implications for the relationship of the foreign-exchange risk premium and interest-rate differentials. We document these puzzles, and show that existing models appear unable to account for both. A model that might reconcile the findings is discussed.
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