American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Bond Convenience Yields and Exchange Rate Dynamics
American Economic Journal: Macroeconomics
vol. 12,
no. 2, April 2020
(pp. 124–66)
Abstract
This paper proposes a new explanation for the failure of Uncovered Interest Parity (UIP) that rationalizes both the classic UIP puzzle and the evidence that the puzzle reverses direction at longer horizons. In the model, excess currency returns arise as compensation for endogenous fluctuations in bond convenience yield differentials. Due to the interaction of monetary and fiscal policy, the impulse response of the equilibrium convenience yield is nonmonotonic, which generates the reversal of the puzzle. The calibrated model fits exchange rate dynamics very well. I also find direct evidence linking convenience yields to excess currency returns.Citation
Valchev, Rosen. 2020. "Bond Convenience Yields and Exchange Rate Dynamics." American Economic Journal: Macroeconomics, 12 (2): 124–66. DOI: 10.1257/mac.20170391Additional Materials
JEL Classification
- E43 Interest Rates: Determination, Term Structure, and Effects
- E52 Monetary Policy
- F31 Foreign Exchange
- F41 Open Economy Macroeconomics
- H63 National Debt; Debt Management; Sovereign Debt
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