Exchange Rates, Interest Rates, and the Risk Premium

Charles Engel

American Economic Review, 2016, vol. 106, issue 2, 436-74

Abstract: 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. (JEL E43, F31, G15)

JEL-codes: E43 F31 G15 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/aer.20121365
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (156)

Downloads: (external link)
http://www.aeaweb.org/articles.php?doi=10.1257/aer.20121365 (application/pdf)
https://www.aeaweb.org/aer/ds/10602/20121365_ds.zip (application/zip)
https://www.aeaweb.org/aer/data/10602/20121365_data.zip (application/zip)
https://www.aeaweb.org/aer/app/10602/20121365_app.pdf (application/pdf)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
Working Paper: Exchange Rates, Interest Rates, and the Risk Premium (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aecrev:v:106:y:2016:i:2:p:436-74

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

American Economic Review is currently edited by Esther Duflo

More articles in American Economic Review from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().