 When does uncovered interest parity hold?Michael Moore and Maurice Roche Journal of International Money and Finance, 2012, vol. 31, issue 4, 865-879 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. Keywords: Monetary volatility; Uncovered interest parity; Forward bias puzzle; Habit persistence; Carry trade (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:31:y:2012:i:4:p:865-879 DOI: 10.1016/j.jimonfin.2012.01.005 Access Statistics for this article Journal of International Money and Finance is currently edited by J. R. Lothian More articles in Journal of International Money and Finance from Elsevier |
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