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Deviations From Uncovered Interest Parity

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  • Evan Tanner

Abstract

Ex-post deviations from uncovered interest parity (UIP) – realized differences between dollar returns on identical assets of different currencies – equal the real interest differential plus real exchange rate growth. Among industrialized countries, UIP deviations are largely explained by unanticipated real exchange rate growth, but among developing countries, real interest differentials are “where the action is.” This observation is due to the greater variability of inflation in developing countries, but may also stem from higher and more variable risks and capital controls in these countries. Also, among developing countries with moderate inflation, offsetting comovements of real interest differentials and real exchange growth support the sticky-price hypothesis.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 98/117.

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Length: 24
Date of creation: 01 Aug 1998
Date of revision:
Handle: RePEc:imf:imfwpa:98/117

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Cited by:
  1. Zapatero, Fernando & Reverter, Luis F., 2003. "Exchange rate intervention with options," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 289-306, April.
  2. Kiss M., Norbert, 2005. "A jegybanki devizapiaci intervenció hatékonysága. Nemzetközi tapasztalatok és elméleti megfontolások
    [Effectiveness of central-bank intervention on foreign-exchange markets. International ex
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 846-872.
  3. Lothian, James R. & Wu, Liuren, 2011. "Uncovered interest-rate parity over the past two centuries," Journal of International Money and Finance, Elsevier, vol. 30(3), pages 448-473, April.
  4. Jorge Iván Canales Kriljenko & Cem Karacadag & Roberto Pereira Guimarães, 2003. "Official Intervention in the Foreign Exchange Market," IMF Working Papers 03/152, International Monetary Fund.

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