The Uncovered Interest Parity Puzzle, Exchange Rate Forecasting, and Taylor Rules

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Titel: The Uncovered Interest Parity Puzzle, Exchange Rate Forecasting, and Taylor Rules

Beteiligte: Engel, Charles [VerfasserIn]; Liu, Chang [Sonstige Person, Familie und Körperschaft]; Liu, Chenxin [Sonstige Person, Familie und Körperschaft]; Lee, Dohyeon [Sonstige Person, Familie und Körperschaft]; Wu, Steve Pak Yeung [Sonstige Person, Familie und Körperschaft]

Körperschaft: National Bureau of Economic Research

Erschienen: Cambridge, Mass: National Bureau of Economic Research, November 2017

Umfang: 1 Online-Ressource

Sprache: Englisch

DOI: 10.3386/w24059

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Reproduktionsnotiz: Hardcopy version available to institutional subscribers

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Beschreibung: Recent research has found that the Taylor-rule fundamentals have power to forecast changes in U.S. dollar exchange rates out of sample. Our work casts some doubt on that claim. However, we find strong evidence of a related in-sample anomaly. When we include U.S. inflation in the well-known uncovered interest parity regression of the change in the exchange rate on the interest-rate differential, we find that the inflation variable is highly significant and the interest-rate differential is not. Specifically, high U.S. inflation in one month forecasts dollar appreciation in the subsequent month. We introduce a model in which a Taylor rule determines monetary policy, but in which not only monetary shocks but also liquidity shocks drive nominal interest rates. This model can potentially account for the empirical findings

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