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When does uncovered interest parity hold?
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Moore, Michael J. and Roche, Maurice J. (2012) When does uncovered interest parity hold? Journal of International Money and Finance, Volume 31 (Number 4). pp. 865-879. doi:10.1016/j.jimonfin.2012.01.005
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Official URL: http://dx.doi.org/10.1016/j.jimonfin.2012.01.005
Abstract
A consensus is emerging that returns to the currency carry trade are driven by two factors. One of these is probably consumption risk but there is widespread disagreement about the identity of the remaining factor. This paper bolsters the case for volatility being the unknown factor. A structural model that specifies that monetary volatility is the second factor is tested for 56 monetary regimes using the artificial economy methodology. The negative slope in the Fama regression arises when monetary volatility is low and the precautionary savings motive dominates the intertemporal substitution motive. When monetary volatility is high, the Fama slope is positive in line with uncovered interest parity. We conclude that, given the predominance of precautionary savings, the degree of monetary volatility explains whether uncovered interest parity holds.
| Item Type: | Journal Article | ||||
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| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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| Journal or Publication Title: | Journal of International Money and Finance | ||||
| Publisher: | Elsevier BV | ||||
| ISSN: | 02615606 | ||||
| Official Date: | June 2012 | ||||
| Dates: |
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| Volume: | Volume 31 | ||||
| Number: | Number 4 | ||||
| Number of Pages: | 14 | ||||
| Page Range: | pp. 865-879 | ||||
| DOI: | 10.1016/j.jimonfin.2012.01.005 | ||||
| Status: | Peer Reviewed | ||||
| Publication Status: | Published | ||||
| Access rights to Published version: | Restricted or Subscription Access |
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