Rabitsch, Katrin. 2016. An Incomplete Markets Explanation of the UIP Puzzle. Review of International Economics 24 (2), 422-446.
BibTeX
Abstract
A large literature attributes failure of uncovered interest rate parity (UIP) to the existence of a time-varying risk premium. This paper presents a mechanism in a simple two-country two-good endowment economy with incomplete markets that generates sizeable deviations from UIP. In a parameterization where international wealth effects are important, liquidity constraints on an internationally traded bond and agents’ strong resulting precautionary motives successfully generates a time-varying risk premium: countries that have accumulated large outstanding external positions have, being closer to the constraints, stronger precautionary motives and their asset carries a risk premium.
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Status of publication | Published |
---|---|
Affiliation | WU |
Type of publication | Journal article |
Journal | Review of International Economics |
Citation Index | SSCI |
WU Journalrating 2009 | A |
WU-Journal-Rating new | FIN-A, VW-C |
Language | English |
Title | An Incomplete Markets Explanation of the UIP Puzzle |
Volume | 24 |
Number | 2 |
Year | 2016 |
Page from | 422 |
Page to | 446 |
Reviewed? | Y |
URL | http://dx.doi.org/10.1111/roie.12220 |
DOI | http://dx.doi.org/10.1111/roie.12220 |