The real exchange rate, real interest rates, and the risk premium
By: Charles Engel
Contributors: National Bureau of Economic Research
Series: NBER working paper series -- working paper 17116; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 17116.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "The well-known uncovered interest parity puzzle arises from the empirical regularity that, among developed country pairs, the high interest rate country tends to have high expected returns on its short term assets.  At the same time, another strand of the literature has documented that high real interest rate countries tend to have currencies that are strong in real terms - indeed, stronger than can be accounted for by the path of expected real interest differentials under uncovered interest parity.  These two strands - one concerning short-run expected changes and the other concerning the level of the real exchange rate - have apparently contradictory implications for the relationship of the foreign exchange risk premium and interest-rate differentials.  This paper documents the puzzle, and shows that existing models appear unable to account for both empirical findings.  The features of a model that might reconcile the findings are discussed"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 8/30/2011.

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