BoE paper models exchange rates with private money creation
Uncovered interest parity does a poor job of explaining exchange rates on its own, authors say
New research published by the Bank of England proposes a model of exchange rates that reflects the importance of both financial positions and private money creation in the economy.
Authors Ambrogio Cesa-Bianchi, Michael Kumhof, Andrej Sokol and Gregory Thwaites say it is “widely recognised” that exchange rates are “poorly explained” by theories based on uncovered interest parity (UIP). They note the essential role played by the supply of assets and liabilities in domestic and foreign currencies
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