Nominal exchange rate dynamics and monetary policy: uncovered interest rate parity and purchasing power parity revisited

Nathan Sussman and Yossi Saadon

No 13235, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The increasing globalization of trade in goods and services and the deepening of financial markets have reduced frictions that may impede the PPP and UIP relationships' operation in the short run. In this paper, we estimate the short term relative PPP and UIP relationships. Using data from Israel, which has a deep market for inflation expectations for 12 months, we show that relative PPP and UIP cannot be rejected. Deviations from equilibrium last less than a year. Data from Israel’s capital account of the balance of payments shows that the deviations are not destabilizing. Our findings suggest that greater globalization, financial deepening, and developing a market for short-term inflation expectations contribute to monetary policy effectiveness.

Keywords: Purchasing power parity; Uncovered interest rate parity; Exchange rates; Monetary policy; Inflation expectations; Balance sheet effects (search for similar items in EconPapers)
JEL-codes: E52 F3 F31 F41 G15 (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
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