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Does Uncovered Interest Rate Parity Hold After All?

Author

Listed:
  • Muhammad Omer

    () (State Bank of Pakistan)

  • Jakob de Haan

    () (De Nederlandsche Bank)

  • Bert Scholtens

    () (CESifo, Germany)

Abstract

This paper tests Uncovered Interest Rate Parity (UIP) using LIBOR rates for the major international currencies for the period January 2001 to December 2008. We find that UIP generally holds over a short-term horizon for individual and groups of currencies. Our results suggest that it is important to take the cross correlation between currencies into account. We also find that ‘state dependence’ plays an important role for currencies with a negative interest differential vis-à-vis the US. This ‘state dependence’ could also be instrumental in explaining exchange rate overshooting. Length: 22 pages

Suggested Citation

  • Muhammad Omer & Jakob de Haan & Bert Scholtens, 2013. "Does Uncovered Interest Rate Parity Hold After All?," SBP Working Paper Series 57, State Bank of Pakistan, Research Department.
  • Handle: RePEc:sbp:wpaper:57
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    References listed on IDEAS

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    Cited by:

    1. Saadon, Yossi & Sussman, Nathan, 2018. "Nominal exchange rate dynamics and monetary policy: uncovered interest rate parity and purchasing power parity revisited," CEPR Discussion Papers 13235, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    UIP; LIBOR; system SUR; system DGLS; system DOLS;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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