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Deviations From Uncovered Interest Parity: A Global Guide to Where the Action Is
Author:
Mr. Evan C Tanner
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Series:
IMF Working Papers
Volume/Issue:
Volume 1998: Issue 117
Language:
English
Publication Date:
01 Aug 1998
DOI:
https://doi.org/10.5089/9781451941647.001
ISBN:
9781451941647
ISSN:
1018-5941
Pages:
24
Keywords:
WP; UIP deviation; exchange rate; exchange rate growth; interest differential; inflation differential; deviations from UIP; Real exchange rates; Interest rate parity; Vector autoregression; Exchange rate adjustments; Real interest rates; Africa; Asia and Pacific
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund