Template-Type: ReDIF-Paper 1.0
Author-Name: Campbell-Pownall, R.A.J.
Author-Name-Last: Campbell-Pownall
Author-Name-First: Rachel
Author-Name: Koedijk, C.G.
Author-Name-Last: Koedijk
Author-Name-First: Kees
Author-Name: Lothian, J.R.
Author-Name-Last: Lothian
Author-Name-First: James
Author-Name: Mahieu, R.J.
Author-Name-Last: Mahieu
Author-Name-First: Ronald
Author-Person: pma286
Title: Irving Fisher and the UIP Puzzle: Meeting the Expectations a Century Later
Abstract: We review Irving Fisher’s seminal work on UIP and on the closely related equation linking interest rates and inflation. Like Fisher, we find that the failures of UIP are connected to individual episodes in which errors surrounding exchange rate expectations are persistent, but eventually transitory. We find considerable commonality in deviations from UIP and PPP, suggesting that both of these deviations are driven by a common factor. Using a dynamic latent factor model, we find that deviations from UIP are almost entirely due to expectational errors in exchange rates, rather than attributable to the risk premium; a result consistent with those reported by Fisher a century ago.
Creation-Date: 2007-12-07
File-URL: https://repub.eur.nl/pub/10774/ERS-2007-088-F&A.pdf
File-Format: application/pdf
Series: RePEc:ems:eureri
Number: ERS-2007-088-F&A
Classification-JEL: E42, G3, M
Keywords: Irving Fisher, PPP, UIP, exchange rates, inflation, interest rates
Handle: RePEc:ems:eureri:10774