Uncovered Interest Parity
IMF Working Papers, April 1, 2006
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Bibliographic details
- Authors: Peter Isard
- Published: April 1, 2006
- Series: IMF Working Papers
Summary
- This paper provides an overview of the uncovered interest parity assumption.
- It traces the history of the interest parity concept, summarizes evidence on the empirical validity of uncovered interest parity, and discusses different interpretations of the evidence and the implications for macroeconomic analysis.
- The uncovered interest parity assumption has been an important building block in multiperiod models of open economies.
- Although its validity is strongly challenged by the empirical evidence, at least at short time horizons, its retention in macroeconomic models is supported on pragmatic grounds by the lack of much empirical support for existing models of the exchange risk premium.
Empirical Evidence and Interpretation
- Empirical validity of uncovered interest parity is strongly challenged, especially at short time horizons.
- Different interpretations of the empirical evidence are discussed in the paper.
- Retention of uncovered interest parity in models is motivated by the limited empirical support for existing models of the exchange risk premium.
Role in Macroeconomic Models
- Uncovered interest parity is an important building block in multiperiod models of open economies.
- The paper examines implications for macroeconomic analysis when uncovered interest parity does not hold empirically.
Subjects and Keywords
- Subject: Currencies, Exchange rates, Forward exchange rates, Interest rate parity, Spot exchange rates
- Keywords: risk premium, WP
IMF Working Papers — Uncovered Interest Parity (Peter Isard, April 1, 2006).
Content in this bundle
- Uncovered Interest Parity: Peter Isard; IMF Working Paper 06/96: April 1, 2006