The Simultaneity Bias of the Uncovered Interest Rate Parity: Evidence for Brazil

Alex Ferreira

No 08_20, Working Papers from Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto

Abstract: We test ex ante uncovered interest parity (UIP) for Brazil using survey data of ex- change rate expectations from the Brazilian Central Bank. Using data from 2001M11 until 2007M12 and Ordinary Least Squares, we found that the estimated UIP parameter is smaller than one, which is a common ¯nding. We then develop a model that explains how a negative bias can arise due to the simultaneous actions between the Central Bank and speculators. Our results, using Instrumental Variables, show that the bias can be re- duced, and lend support to ex ante UIP. The reduced form, dynamically complete model provides the best ¯t for expected exchange rate changes, as it aims to represent the data generation process of the observed data, in contrast to the single structural equation.

Keywords: Uncovered Interest Rate Parity; Simultaneity (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 F31 (search for similar items in EconPapers)
Date: 2008
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