Covered Interest Parity, Uncovered Interest Parity, and Exchange Rate Dynamics

Jonathan Eaton and Stephen J Turnovsky

No 984, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A number of macroeconomic models of open economies under flexible exchange rate assume a strong version of perfect capital mobility which implies that currency speculation commands no risk premium. If this assumption is dropped a number of important results no longer obtain. First, the exchange rate and interest rate cannot be in steady state unless both the government deficit and current account equal zero, not simply their sum, as would otherwise be the case. Second, even in steady state the domestic interest rate can deviate from the foreign interest rate by an amount which de ends upon relative domestic asset supplies. Finally, introducing risk aversion on the part of speculators can reduce the response on impact of the exchange rate to changes in domestic asset supplies. In this sense rational speculators, if they are less risk averse than other agents, can destabilize exchange markets.

Date: 1982-09
Note: ITI IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published as Eaton, Jonathan and Stephen J. Turnovsky. "Covered Interest Parity, Uncovered Interest Parity, and Exchange Rate Dynamics." Economic Journal, Vol. 93, No. 3. Cambridge University Press, (Sept. 1983), pp. 555-575. Journal of Economic Literature Vol. 22, No.1, (March 1984).

Downloads: (external link)
http://www.nber.org/papers/w0984.pdf (application/pdf)

Related works:
Journal Article: Covered Interest Parity, Uncovered Interest Parity and Exchange Rate Dynamics (1983)
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:nbr:nberwo:0984

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w0984

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().