Deviations from Uncovered Interest Rate Parity: A Post Keynesian Explanation

John Harvey

No 200301, Working Papers from Texas Christian University, Department of Economics

Abstract: Finding satisfactory explanations of deviations from uncovered interest rate parity (UIRP) has proved to be a frustrating experience for Neoclassical economists. Studies have focused on the role of risk, but thus far no one has been able to put forward a source thereof that can account for the specific pattern of deviations from UIRP. This paper offers an alternative perspective that finally resolves the mystery. Drawing on the work of Marc Lavoie and John Smithin and extending it with some basic Post Keynesian propositions regarding endogenous money, uncertainty, and nonergodicity, it is shown that one can devise a comprehensive explanation of UIRP--an explanation that shows that much more than risk is responsible for deviations. In particular, it is argued that Keynes's "confidence" is a vitally important and overlooked factor. This contention is supported by a regression analysis of the U.S.-German and U.S.-Japanese asset markets.

Keywords: confidence; exchange rate; interest rate parity; risk (search for similar items in EconPapers)
JEL-codes: F31 F32 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2003-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published in Journal of Post Keynesian Economics, Fall 2004, pages 19-35

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http://www.econ.tcu.edu/RePEc/tcu/wpaper/wp03-01.pdf First version, 2003 (application/pdf)

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Journal Article: Deviations from uncovered interest rate parity: a Post Keynesian explanation (2004)
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