A Liquidity-Based Resolution of the Uncovered Interest Parity Puzzle

Seungduck Lee () and Kuk Mo Jung ()
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Seungduck Lee: Department of Economics, Sungkyunkwan University, Seoul, Republic of Korea
Kuk Mo Jung: Department of Economics, Sogang University, Seoul

No 1902, Working Papers from Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy)

Abstract: A new monetary theory is set out to resolve the "Uncovered Interest Parity (UIP)" Puzzle. It explores the possibility that liquidity properties of money and nominal bonds can account for the puzzle. A key concept in our model is that nominal bonds carry liquidity premia. We show that the UIP can fail to hold under the economic environment where collateral pledgeability and/or liquidity of nominal bonds and/or collateralized credit based transactions are relatively bigger. Our liquidity based theory can help understanding many empirical observations that risk based explanations find difficult to reconcile with.

Keywords: uncovered interest parity puzzle; monetary search models; FOREX market (search for similar items in EconPapers)
JEL-codes: E31 E4 E51 F31 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2019
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sgo:wpaper:1902

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