Uncertainty and the Uncovered Interest Parity Condition: How Are They Related?

Nelson R. Ramírez-Rondán and Marco Terrones

MPRA Paper from University Library of Munich, Germany

Abstract: There is a well-established literature that documents the failure of the uncovered interest parity (UIP) condition. While a host of factors have been examined as possible reasons behind this result, the role of uncertainty is not fully understood. In this paper, we examine the extent to which economic uncertainty affects the UIP condition in a sample of fourteen economies over the period 2003:1-2018:12. Using threshold panel regression models and exchange rate survey data, we find evidence that the UIP condition holds during low-uncertainty periods but does not during high-uncertainty periods. This finding is robust to the inclusion of other controls, different proxies of uncertainty, changes in the deposit maturity, and estimation method.

Keywords: Exchange rates; uncertainty; panel threshold models. (search for similar items in EconPapers)
JEL-codes: D80 E43 F31 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-mac and nep-ore
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Uncertainty and the uncovered interest parity condition: How are they related? (2024)
Working Paper: Uncertainty and the Uncovered Interest Parity Condition: How Are They Related? (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:97524

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