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Monetary Policy and the Uncovered Interest Rate Parity Puzzle: Theory and Empirical Results for Oceania

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  • Alfred V. Guender

Abstract

type="main" xml:id="ecor12097-abs-0001"> This article offers a theory-based explanation for why high- interest-rate countries see their currencies appreciate, the so-called UIP puzzle. The central bank bases its target rule on the lag of the policy instrument and the CPI inflation rate. When combined with a stylised model of an open economy, the endogenous target rule can account for the systematic negative relation between the change in the exchange rate and the lagged interest rate differential. Foreign inflation and the foreign interest rate also affect nominal exchange rate changes. The model-based behaviour of the exchange rate is tested on New Zealand and Australian data with mixed results.

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  • Alfred V. Guender, 2014. "Monetary Policy and the Uncovered Interest Rate Parity Puzzle: Theory and Empirical Results for Oceania," The Economic Record, The Economic Society of Australia, vol. 90(289), pages 207-219, June.
    • Handle: RePEc:bla:ecorec:v:90:y:2014:i:289:p:207-219
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    File URL: http://hdl.handle.net/10.1111/ecor.2014.90.issue-289
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    Cited by:

    1. Fukuda, Shin-ichi & Tanaka, Mariko, 2017. "Monetary policy and covered interest parity in the post GFC period: Evidence from the Australian dollar and the NZ dollar," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 301-317.
    2. Alfred V Guender, 2015. "International Evidence on the Role of Monetary Policy in the Uncovered Interest Rate Parity Puzzle," Working Papers in Economics 15/15, University of Canterbury, Department of Economics and Finance.

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