This paper proposes a different empirical approach to estimate the UIP by analyzing a large number of cross-country bilateral exchange rates using cross-section analysis. Different from conventional time-series UIP, cross-sectional UIP is examined with single equation estimation and panel regression model estimation. The exchange rates analyzed here include a broad spectrum of countries: developed, developing, low inflation and high inflation countries. Based on the empirical evidence, there does not appear to be a well-publicized UIP puzzle for cross-sectional UIP, and the slope estimates remain largely between zero and one throughout the sample periods, with a few exceptions. Evidence of UIP is more clear for low inflation countries than for high inflation countries. As interest rate maturity becomes longer, UIP relationship becomes weaker.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
10360.
Find related papers by JEL classification: G15 - Financial Economics - - General Financial Markets - - - International Financial Markets F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics F31 - International Economics - - International Finance - - - Foreign Exchange
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