Irving Fisher, Expectational Errors, and the UIP Puzzle
James Lothian and
Authors registered in the RePEc Author Service: Rachel A J Pownall (Campbell) ()
No 6294, CEPR Discussion Papers from C.E.P.R. Discussion Papers
We review Irving Fisher’s seminal work on UIP and on the closely related equation linking interest rates and inflation. Like Fisher, we find that the failures of UIP are connected to individual episodes in which errors surrounding exchange rate expectations are persistent, but eventually transitory. We find considerable commonality in deviations from UIP and PPP, suggesting that both of these deviations are driven by a common factor. Using a dynamic latent factor model, we find that deviations from UIP are almost entirely due to forecasting errors in exchange rates, a result consistent with those reported by Fisher a century ago.
Keywords: Expectations formation; Irving Fisher; small-sample problems; UIP (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
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