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Nominal exchange rate dynamics and monetary policy: uncovered interest rate parity and purchasing power parity revisited

Yossi Saadon and Nathan Sussman

No 13235, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The increasing globalization of trade in goods and services and the deepening of financial markets have reduced frictions that may impede the operation of the PPP and UIP relationships in the short run. In this paper, we estimate the short term relative PPP and UIP relationships. Using data from Israel, which has a deep market for inflation expectations for 12 months, we show that relative PPP and UIP cannot be rejected. Deviations from equilibrium last less than a year. Data from Israel's capital account of the balance of payments shows that the deviations are not destabilizing. Our findings suggest that greater globalization and financial deepening contribute to the effectiveness of monetary policy.

Keywords: Balance sheet effects; Exchange Rates; Inflation expectations; monetary policy; purchasing power parity; uncovered interest rate parity (search for similar items in EconPapers)
JEL-codes: E52 F3 F31 F41 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
Date: 2018-10
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