In economics, a puzzle occurs when empirical data does not match the expected outcome that theory would predict. One such puzzle is the uncovered interest rate parity, also known as UIP. This specific puzzle is about interest rate differentials and exchange rate fluctuations, and how the empirical findings do not support the theory behind them. In order to further understand this vast research has been conducted on this puzzle in order to attempt to explain why it is occurring. The reason why there is a desire to understand why this is occurring is because one of the foundations of corporate finance is that no arbitrage opportunities are present, but here we see what appears to be one. However, let us first explain what theory says should…show more content… Now looking at several case studies the first being Adrian W. Throop. In his model, he runs four regressions where fluctuations in exchange rate between the dollar and other major currencies are the dependent variables: Trade-Weighted US$, Yen/US$, Mark/US$, and Pound/US$. As for the independent we see the focus on the interest rate change in the domestic and foreign market. He includes a great deal of other information in how he acquires what he calls the real interest rate, and thus account for shocks in the market. This is done to test the hypothesis that sticky price model of exchange rates can explain why this puzzle is occurring with interest rate and exchange rate of foreign currency. Whereas, the null hypothesis is that sticky price model of exchange rates cannot explain why the puzzle is occurring. In conclusion, Throop found that although the sticky model made sense theoretically when put to the test empirically it fell short and was not able to adequately account for the UIP puzzle. Now looking at Alfred V. Guender and his article on UIP he also uses a regression to test the UIP puzzle, however, he believes that the conventional test equation of the UIP hypothesis is plagued by omitted variable bias (Guender, 2014). As such he hypothesis there is an inverse relationship between the exchange rate change and the lagged interest rate differential, and he also takes into account variables that are typically omitted, but do have an impact on the model such
the interest rate in the loanable funds market, and in red, the interest rate in the money market. If the real interest rate is above the nominal interest rate, either the investment exceeds the desired savings or the supply of money exceeds the demand of money. Shifting the saving curve to the right, and the demand of money to the right, will bring the interest rate in both markets to be the same.
Money and real Interest Rate
Fisher tries to establish the link between money and the interest rate
Interest Rates and Other Critical Determinants of Investment Spending in Bangladesh
Background
Investment, which is a spending devoted to enhancing or maintaining the existing stock of capital in the economy provides goods and services necessary for better standard of living. Moreover, it has greater importance as a policy tool. Policymakers often try to achieve target growth in GDP by influencing the level of investment. They do so by undertaking policies that influence the rate of interests
cover some relationship between macroeconomic indicators, including consumption, interest rate unemployment rate and inflation rate, and with stock price.
Stock price or
the details of Taylor rules which used in this research, Taylor rules is a tool to identify the relationship between monetary policies and stock markets, which formulated as:
in this formula, indicates the interest rate that set by the Japanese central bank, in the dataset, it is shown as the log of federal funds rate(logffr), indicates the rate of inflation while means the desired rate of inflation which always treated as zero. is the level of output while indicates the potential output, it
The values can differ at various times for the same objects or person. The variables consist of dependent and independent.
3.3.1 Dependent Variable
The dependent variable is denoted as variable of primary interest to the researcher as it provides a measurement of the effect of the independent variables. In this research, foreign direct investment (FDI) is the designated dependent variable where it indicates the outcome of the change brought about by changes
increasingly volatile. These factors mean that the emotions of fear and greed will drive these movements. To fully understand these elements requires focusing on the causative variables, the relationship between the different indicators, interpreting the coefficients / providing an analysis of the correlation coefficient values and a summary of what was discovered. Together, these elements will highlight the way these transformations are occurring and the long term impacts they will have on investors' perceptions
different economists gives a very different picture of the relationship between stock returns and economic growth, but very little empirical evidences to support the view with. Many economists and researchers supported the view that, stock returns and economic growth does not have a positive
Canada, Australia, New Zealand and Japan. Emerging countries can be identifying with rapid growth rate and development but lower per capita than developed countries, namely Brazil, Russia, India, and China, Ireland, Italy, Greece, Spain. The economic growth of countries can be measured by gross domestic product (GDP) per capita.
This essay is going to find out “What are the main reasons behind different rate of economic growth in emerging and developed economics in last 15 years?” In hear I selected
will receive a coupon as an interest and at the maturity a principal plus coupon.
(b) Coupon and principal of the Regular Treasury bonds are fixed, therefore if the inflation rate increases in the forecasting future, investor will receive the same amount of coupon and principal with less real value and purchasing power.
(c)TIPS are simultaneously related to change of inflation rate which means the principal and coupon will adjust instantly to change of inflation rate. TIPS like Regular Treasury