Testing Uncovered Interest Parity at Short and Long Horizons During the Post-Bretton Woods Era

30 Pages Posted: 22 Feb 2005 Last revised: 9 Oct 2022

See all articles by Menzie David Chinn

Menzie David Chinn

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics; National Bureau of Economic Research (NBER)

Guy Meredith

International Monetary Fund (IMF) - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: January 2005

Abstract

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 longer-maturity bonds for the U.S., Germany, Japan and Canada. The results of these long-horizon regressions are much more positive -- the coefficients on interest differentials are of the correct sign, and most are closer to the predicted value of unity than to zero. These results are robust to the use of different data frequencies, sample periods, yield definitions, and base currencies. We appeal to an econometric interpretation of the results, which focuses on the presence of simultaneity in a cointegration framework.

Suggested Citation

Chinn, Menzie David and Meredith, Guy, Testing Uncovered Interest Parity at Short and Long Horizons During the Post-Bretton Woods Era (January 2005). NBER Working Paper No. w11077, Available at SSRN: https://ssrn.com/abstract=653023

Menzie David Chinn (Contact Author)

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics ( email )

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Guy Meredith

International Monetary Fund (IMF) - Research Department ( email )

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