Quotation Rabitsch, Katrin. 2016. An Incomplete Markets Explanation of the UIP Puzzle. Review of International Economics 24 (2), 422-446.




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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Publication's profile

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


Rabitsch-Schilcher, Katrin (Details)
Department of Economics (Kubin) (Details)
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