IMF Staff Papers: Volume 49: Special Issue: IMF Annual Research Conference
IMF Staff Papers, November 4, 2002
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Bibliographic details
- Published: November 4, 2002
- Series: IMF Staff Papers
- Volume: 49
- DOI: https://doi.org/10.5089/9781589061231.024
Summary and main empirical findings
- Reports tests of uncovered interest parity (UIP) using daily data for 23 developing and developed countries during the crisis-strewn 1990s.
- UIP definition used: the interest differential is, on average, equal to the ex post exchange rate change.
- Empirical characterization:
- UIP is described as a "classic topic of international finance" and "a critical building block of most theoretical models."
- UIP is also described as "a dismal empirical failure."
- Heterogeneity in results:
- There is a considerable amount of heterogeneity in the results, which differ wildly by country.
- UIP may work differently for countries in crisis, whose exchange and interest rates both display considerably more volatility.
- Statistical power and volatility:
- Higher volatility in crisis countries may provide a more statistically powerful test for the UIP hypothesis.
- Policy relevance:
- Policy-exploitable deviations from UIP are a necessary condition for an interest rate defense.
Data and scope
- Frequency and sample:
- Daily data.
- 23 developing and developed countries.
- Sample period: the 1990s (described as crisis-strewn).
- Topics and subjects covered:
- Subject headings listed: Credit, Depreciation, Exchange rates, Foreign exchange, Money, National accounts, Personal income, Real exchange rates.
- Keywords include: Africa, Central and Eastern Europe, company, Credit, Depreciation, donor community, Europe, Exchange rates, firm performance, Global, lending boom, market reform, Personal income, Real exchange rates, recipient government, SP.
Policy implications and interpretation
- Volatility implications:
- Greater exchange rate and interest rate volatility during crises increases stakes for financial markets and central banks.
- Such volatility may improve the statistical detectability of UIP deviations.
- Policy-exploitable deviations:
- For an interest rate defense to be feasible, deviations from UIP that can be exploited by policy makers must exist.
- Cross-country heterogeneity:
- Because results differ widely by country, policy conclusions cannot be universally applied and require country-specific analysis.