The hypothesis that interest rate differentials are unbiased predictors of future exchange rate movements has been almost universally rejected in empirical studies. In contrast to previous studies, which have used short-horizon data, we test this hypothesis using interest rates on...

In this essay, we evaluate the recent evidence for real interest parity, focusing on long-term yields. Examining the data on financial instruments of various maturities across the G7 countries, we find substantial differences in the degree of real interest equalization measured at different...

An unresolved issue in international macroeconomics is the apparent lack of risk-sharing across countries, which contradicts the prediction of models based on the assumption of complete markets. We assess the importance of financial frictions in this issue by constructing an incomplete market...

This paper proposes a new explanationfor the UIP puzzle by analyzing a large number of cross-country bilateral exchange rates in two dimensions, cross-sectional and time-series. The exchange rates analyzed here includes a broad spectrum of developed and developing countries. The UIP relationship...

This paper analyzes deviations from uncovered interest rate parity which are interpreted as indicator of the substitutability of currencies. Backward recursive statistical tests and error correction models are applied to study the co-movement of interest rates, and rolling regressions are used...

Many of the leading models of the carry trade imply that, contrary to the empirical evidence, a country's currency depreciates in times of high consumption and output growth, a manifestation of the Backus and Smith (1993) puzzle. We propose a modification of these models to account for financial...

This chapter surveys recent theoretical and empirical contributions on foreign exchange rate determination. The chapter first examines monetary models under uncovered interest parity and rational expectations, and then considers deviations from UIP/rational expectations: foreign exchange risk...

The extant structural vector autoregression (SVAR) literature typically focuses on one shock at a time when studying the behavior of the exchange rates, which risks confounding the identified shock with the endogenous responses to the unidentified shocks. This paper proposes a novel SVAR...

In recent years, the development of the Colombian financial markets have done that the integration with the international markets had been evident. For this reason, the research about the relation level between different interest rates is outstanding. This paper, try to find evidence about the...

We revisit the "puzzle" in open economy studies that evidence of international risk-sharing is hardly seen despite the completeness of the financial market. We reassess both risk-pooling via state-contingent bonds, and uncovered interest parity - both were believed to be different, and...