Irving Fisher, Expectational Errors, and the UIP Puzzle
46 Pages Posted: 22 May 2008
There are 2 versions of this paper
Irving Fisher, Expectational Errors and the Uip Puzzle
Date Written: May 2007
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 forecasting errors in exchange rates, a result consistent with those reported by Fisher a century ago.
Keywords: Expectations formation, Irving Fisher, small-sample problems, UIP
JEL Classification: B01, F31
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence
-
The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk
By Hanno N. Lustig and Adrien Verdelhan
-
The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk
By Hanno N. Lustig and Adrien Verdelhan
-
The Returns to Currency Speculation
By A. Craig Burnside, Martin Eichenbaum, ...
-
The Returns to Currency Speculation
By A. Craig Burnside, Martin Eichenbaum, ...
-
The Cross-Section of Currency Risk Premia and Us Consumption Growth Risk
By Hanno N. Lustig and Adrien Verdelhan
-
The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: A Reply
By Hanno N. Lustig and Adrien Verdelhan
-
The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: A Reply
By Hanno N. Lustig and Adrien Verdelhan
-
Carry Trades and Currency Crashes
By Markus K. Brunnermeier, Stefan Nagel, ...