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The Simultaneity Bias of the Uncovered Interest Rate Parity: Evidence for Brazil

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  • Alex Luiz Ferreira

Abstract

We test ex ante uncovered interest parity (UIP) for Brazil using survey data of ex- change rate expectations from the Brazilian Central Bank. Using data from 2001M11 until 2007M12 and Ordinary Least Squares, we found that the estimated UIP parameter is smaller than one, which is a common ¯nding. We then develop a model that explains how a negative bias can arise due to the simultaneous actions between the Central Bank and speculators. Our results, using Instrumental Variables, show that the bias can be re- duced, and lend support to ex ante UIP. The reduced form, dynamically complete model provides the best ¯t for expected exchange rate changes, as it aims to represent the data generation process of the observed data, in contrast to the single structural equation.

Suggested Citation

  • Alex Luiz Ferreira, 2008. "The Simultaneity Bias of the Uncovered Interest Rate Parity: Evidence for Brazil," Working Papers 08_20, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto.
    • Handle: RePEc:fea:wpaper:08_20
    as

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    References listed on IDEAS

    as
    1. McCallum, Bennett T., 1994. "A reconsideration of the uncovered interest parity relationship," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 105-132, February.
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    4. Alexius, Annika, 2002. "Can Endogenous Monetary Policy Explain the Deviations from UIP," Working Paper Series 2002:17, Uppsala University, Department of Economics.
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    More about this item

    Keywords

    Uncovered Interest Rate Parity; Simultaneity;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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