The Real Exchange Rate, Real Interest Rates, and the Risk Premium

Centre for Applied Macroeconomic Analysis

Event details


Date & time

Wednesday 31 October 2012


Arndt Faculty Suite (H.W. Arndt Bldg 25A)


Professor Charles Engel, University of Wisconsin at Madison and NBER


Crawford Events
6125 1224
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 bonds. 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 seminar will examine the puzzle and how it might pose a challenge for asset pricing models. The features of a model that might reconcile the findings are discussed.

This event is presented by the Centre for Applied Macroeconomic Analysis (CAMA) at the Crawford School of Public Policy and the Research School of Economics, ANU.

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