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Uncovered Interest Parity

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  • Peter Isard
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    Abstract

    This paper provides an overview of the uncovered interest parity assumption. It traces the history of the interest parity concept, summarizes evidence on the empirical validity of uncovered interest parity, and discusses different interpretations of the evidence and the implications for macroeconomic analysis. The uncovered interest parity assumption has been an important building block in multiperiod models of open economies, and although its validity is strongly challenged by the empirical evidence, at least at short time horizons, its retention in macroeconomic models is supported on pragmatic grounds by the lack of much empirical support for existing models of the exchange risk premium.

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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=19096
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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/96.

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    Length: 14
    Date of creation: 01 Apr 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/96

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    Related research

    Keywords: Exchange rates; Interest rates; exchange rate; foreign exchange; exchange rate expectations; spot exchange rate; exchange risk; forward exchange; spot exchange rates; international finance; exchange markets; forward exchange rate; foreign exchange markets; forward exchange rates; exchange market intervention; exchange rate economics; foreign assets; exchange rate risk; exchange risks; exchange rate uncertainty; financial globalization; exchange rate changes; forward exchange markets; annual exchange rate; foreign exchange futures; flexible exchange rates; exchange rate volatility; capital flows; foreign exchange market; exchange rate movements; globalization;

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    Cited by:
    1. Loring, Grace & Lucey, Brian, 2013. "An analysis of forward exchange rate biasedness across developed and developing country currencies: Do observed patterns persist out of sample?," Emerging Markets Review, Elsevier, vol. 17(C), pages 14-28.
    2. Erdemlioglu, Deniz M, 2007. "A new Test of Uncovered Interest Rate Parity: Evidence from Turkey," MPRA Paper 10787, University Library of Munich, Germany.
    3. Li, Dandan & Ghoshray, A. & Morley, B., 2011. "Uncovered Interest Parity and the Risk Premium," Department of Economics Working Papers 24072, University of Bath, Department of Economics.
    4. M. Hadzi-Vaskov & C.J.M. Kool, 2006. "The importance of interest rate volatility in empirical tests of uncovered interest parity," Working Papers 06-16, Utrecht School of Economics.
    5. Rodrigo Caputo G. & Marco Núñez N. & Rodrigo O. Valdés P., 2008. "Exchange Rate Analysis in Practice," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 11(1), pages 61-91, April.
    6. Ozgur Aslan & H. Levent Korap, 2010. "Does the uncovered interest parity hold in short horizons?," Applied Economics Letters, Taylor & Francis Journals, vol. 17(4), pages 361-365.
    7. Evsey Gurvich & Vladimir Sokolov & Alexey Ulyukaev, 2009. "Analysis of the Relationship Between the Exchange Rate Policy of the Russian Central Bank and the Interest Rates: Uncovered and Covered Parity," Journal of the New Economic Association, New Economic Association, issue 1-2, pages 104-126.
    8. Brian Lucey & Grace Loring, 2012. "Forward Exchange Rate Biasedness across Developed and Developing Country Currencies - Do Observed Patterns Persist Out of Sample?Abstract:," The Institute for International Integration Studies Discussion Paper Series iiisdp404, IIIS.
    9. Bank for International Settlements, 2008. "FX reserve management: trends and challenges," BIS Papers, Bank for International Settlements, number 40, July.
    10. Rodrigo Caputo G. & Marco Núñez N. & Rodrigo Valdés P., 2008. "Análisis del tipo de cambio en la práctica," Investigación Conjunta - español, Centro de Estudios Monetarios Latinoamericanos, CEMLA, edition 1, volume 1, number 1-11 edited by Centro de Estudios Monetarios Latinoamericanos (CEMLA).
    11. repec:eid:wpaper:02/11 is not listed on IDEAS
    12. HOROBET Alexandra Lavinia & DUMITRESCU Sorin-Adrian & DUMITRESCU Dan-Gabriel, 2009. "Exchange Rates And Volatility In Central And Eastern Europe: A Test For Uncovered Interest Parity," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 3(1), pages 552-557, May.
    13. Levent, Korap, 2007. "Does the interest differential explain future exchange rate return? a re-examination of the UIP hypothesis for the Turkish economy," MPRA Paper 19618, University Library of Munich, Germany.

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