Expectations and the UIP puzzles when foresight is limited

• 成果类型: Article
• 署名作者: Na, Seunghoon; Xie, Yinxi
• 署名单位: Korea University; Indiana University System; Indiana University Bloomington
• 刊物名称: JOURNAL OF INTERNATIONAL ECONOMICS
• ISSN/ISSBN: 0022-1996
• DOI: 10.1016/j.jinteco.2025.104183
• 发表日期: 2025
• 关键词: prices; POLICY

摘要

This paper studies exchange rate dynamics and excess currency returns by incorporating bounded rationality into a small open-economy New Keynesian model. Decision-makers have limited foresight, planning only up to a finite horizon and approximating continuation values with coarse value functions learned from past experiences. This behavior generates an initial underreaction, followed by an overreaction in beliefs, leading to dynamic overshooting of exchange rate forecast errors. Moreover, the coexistence of forward-and backward-looking components in expectation formation breaks the forecast-horizon invariance implied from rational expectations. Our model thus provides a micro-foundation for understanding time-and forecast-horizon variability in uncovered interest parity (UIP) puzzles, and its predictions align closely with empirical estimates.