The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Uncovered Interest Parity

  • Peter Isard
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_2285

Abstract

This article provides an overview of the uncovered interest parity assumption. It traces the history of the 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 multi-period 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

Arbitrage Capital controls Covered interest parity (CIP) Credit risk Exchange market intervention Exchange rate dynamics Exchange rate expectations Exchange risk premium Forward exchange Incomplete information Inflation expectations Interest rate differentials Jensen’s inequality Keynes, J. M. Peso problem Portfolio balance models Prediction bias Rational bubbles Rational expectations Rational learning Risk premium Spot exchange Unbiasedness hypothesis Uncovered interest parity (UIP) 

JEL Classifications

F31 
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Notes

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Peter Isard
    • 1
  1. 1.