## IMF Staff Papers: Volume 49: Special Issue: IMF Annual Research Conference

_IMF Staff Papers, November 4, 2002_

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**Canonical URL:** [IMF Staff Papers: Volume 49: Special Issue: IMF Annual Research Conference](https://www.imf.org/en/publications/imf-staff-papers/issues/2016/12/30/imf-staff-papers-volume-49-special-issue-imf-annual-research-conference-15743)

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## Bibliographic details
- Published: November 4, 2002
- Series: IMF Staff Papers
- Volume: 49
- DOI: https://doi.org/10.5089/9781589061231.024

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### 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.

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_Source: https://www.imf.org/en/publications/imf-staff-papers/issues/2016/12/30/imf-staff-papers-volume-49-special-issue-imf-annual-research-conference-15743_