The Mystery of the Multiplying Marks: A Modification of the Monetary Model

Citation:

Frankel J. The Mystery of the Multiplying Marks: A Modification of the Monetary Model. Review of Economics and Statistics. 1982;LXIV (3).

Abstract:

The failure of Uncovered Interest Parity is usually attributed to the idea that risk makes domestic and foreign bonds imperfect substitutes in investors' portfolios.  If so, as in the portfolio balance model, the the foreign-domestic return differential should be related to the supplies of foreign and domestic bonds that must be held.  It isn't.

Publisher's Version