Authors: | Hörmann, Markus |
Title: | Liquidity premia, interest rates and exchange rate dynamics |
Language (ISO): | en |
Abstract: | Empirical failure of uncovered interest rate parity (UIP) has become a stylized fact. VARs by Eichenbaum and Evans (1995) and Scholl and Uhlig (2008) find delayed overshooting of the exchange rate in response to a monetary shock. This result contradicts Dornbusch’s (1976) original overshooting, which is based on UIP. This paper presents a model in which assets eligible for central bank’s open market operations, such as government bonds, command liquidity premia. Further, I allow for a key currency which is required to participate in international goods trade. Therefore, assets allowing access to key currency liquidity are held by agents around the globe. I show that liquidity premia lead to a modified UIP condition. In response to a monetary policy shock, the model predicts delayed overshooting of the nominal exchange rate, as in Eichenbaum and Evans (1995). |
Subject Headings: | monetary policy uncovered interest rate parity liquidity premium key currency |
URI: | http://hdl.handle.net/2003/27682 http://dx.doi.org/10.17877/DE290R-13407 |
Issue Date: | 2011-04-12 |
Appears in Collections: | Sonderforschungsbereich (SFB) 823 |
Files in This Item:
File | Description | Size | Format | |
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DP_1511_SFB823_Hoermann.pdf | DNB | 379.97 kB | Adobe PDF | View/Open |
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This item is protected by original copyright
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