Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/125825
Authors: 
Rabitsch, Katrin
Year of Publication: 
2016
Series/Report no.: 
FinMaP-Working Paper 53
Abstract: 
A large literature attributes failure of uncovered interest rate parity (UIP) to the existence of a timevarying risk premium. This paper presents a mechanism in a simple two-country two-good endowment economy with incomplete markets that generates sizeable deviations from UIP. In a parameterization where international wealth effects are important, liquidity constraints on an internationally traded bond and agents' strong resulting precautionary motives successfully generates a time-varying risk premium: countries that have accumulated large outstanding external positions have, being closer to the constraints, stronger precautionary motives and their asset carries a risk premium.
Subjects: 
Uncovered Interest Rate Parity
Incomplete Markets Precautionary Savings
Time-Varying Risk Premium
JEL: 
F31
F41
G12
G15
Document Type: 
Working Paper
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