Summary
The Keynes-Einzig conjecture states that discrepancies between interest parities and forward rates in the interwar period did not cause deliberate transfers through interest arbitrage on a large scale unless and until the profit on the operation was at least 1/2 percent per anum. We further examine this conjecture by employing monthly data for six currencies against the US Dollar for the period 1921-1936. In particular, we analyse the ex ante real returns to uncovered forward speculation in the interwar period. We find that excess returns were predictable and that deviations from covered interest parity (CIP) were large and systematic. Evidence of nonlinear adjustment of CIP is also provided.
Financial support from ESRC grant under grant L/138/25/1004 is gratefully acknowledged.
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Paya, I., Peel, D.A. (2005). Ex ante Real Returns in Forward Market Speculation in the Inter-War Period: Evidence and Prediction. In: Diebolt, C., Kyrtsou, C. (eds) New Trends in Macroeconomics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/3-540-28556-3_7
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DOI: https://doi.org/10.1007/3-540-28556-3_7
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