Deviations From Uncovered Interest Parity: A Global Guide to Where the Action Is

Author/Editor:

Evan C Tanner

Publication Date:

August 1, 1998

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 1998/117

Subject:

Econometric analysis Exchange rate adjustments Financial services Foreign exchange Interest rate parity Real exchange rates Real interest rates Vector autoregression

English

Publication Date:

August 1, 1998

ISBN/ISSN:

9781451941647/1018-5941

Stock No:

WPIEA1171998

Pages:

24

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