Uncovered Interest Parity

14 Pages Posted: 17 May 2006

See all articles by Peter Isard

Peter Isard

International Monetary Fund (IMF) - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: April 2006

Abstract

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, and 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.

Keywords: Interest parity, interest arbitrage, unbiasedness hypothesis, exchange risk premium

JEL Classification: F3, F41

Suggested Citation

Isard, Peter, Uncovered Interest Parity (April 2006). IMF Working Paper No. 06/96, Available at SSRN: https://ssrn.com/abstract=901883

Peter Isard (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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