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Irving Fisher and the UIP Puzzle: Meeting the Expectations a Century Later

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  • Campbell-Pownall, R.A.J.
  • Koedijk, C.G.
  • Lothian, J.R.
  • Mahieu, R.J.

Abstract

We review Irving Fisher’s seminal work on UIP and on the closely related equation linking interest rates and inflation. Like Fisher, we find that the failures of UIP are connected to individual episodes in which errors surrounding exchange rate expectations are persistent, but eventually transitory. We find considerable commonality in deviations from UIP and PPP, suggesting that both of these deviations are driven by a common factor. Using a dynamic latent factor model, we find that deviations from UIP are almost entirely due to expectational errors in exchange rates, rather than attributable to the risk premium; a result consistent with those reported by Fisher a century ago.

Suggested Citation

  • Campbell-Pownall, R.A.J. & Koedijk, C.G. & Lothian, J.R. & Mahieu, R.J., 2007. "Irving Fisher and the UIP Puzzle: Meeting the Expectations a Century Later," ERIM Report Series Research in Management ERS-2007-088-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    • Handle: RePEc:ems:eureri:10774
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    Cited by:

    1. Mouhamadou Sy, 2012. "Exchange Rate Regimes, Capital Controls and the Pattern of Speculative Capital Flows," Working Papers halshs-00684591, HAL.
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    3. Mouhamadou Sy, 2012. "Exchange Rate Regimes, Capital Controls and the Pattern of Speculative Capital Flows," PSE Working Papers halshs-00684591, HAL.

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    More about this item

    Keywords

    Irving Fisher; PPP; UIP; exchange rates; inflation; interest rates;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics

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