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

Author

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  • Ramirez-Rondan, N.R.
  • Terrones, Marco E.
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.

Suggested Citation

  • Ramirez-Rondan, N.R. & Terrones, Marco E., 2019. "Uncertainty and the Uncovered Interest Parity Condition: How Are They Related?," MPRA Paper 97524, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:97524
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    References listed on IDEAS

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    2. Zarazúa Juárez, Carlos Alberto, 2023. "Understanding the natural rate of interest for a small open economy," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 4(3).
    3. Laurent Ferrara & Joseph Yapi, 2022. "Measuring exchange rate risks during periods of uncertainty," International Economics, CEPII research center, issue 170, pages 202-212.

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    More about this item

    Keywords

    Exchange rates; uncertainty; panel threshold models.;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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