Uncovered Interest Parity at Distant Horizons: Evidence on Emerging Economies & Nonlinearities

41 Pages Posted: 11 Sep 2007

See all articles by Arnaud Mehl

Arnaud Mehl

European Central Bank (ECB)

Lorenzo Cappiello

European Central Bank (ECB)

Date Written: August 2007

Abstract

This paper tests for uncovered interest parity (UIP) at distant horizons for the US and its main trading partners, including both mature and emerging market economies, also exploring the existence of nonlinearities. At long and medium horizons, it finds support in favour of the standard, linear, specification of UIP for dollar rates vis-à-vis major floating currencies, but not vis-à-vis emerging market currencies. Moreover, the paper finds evidence that, not only yield differentials widen, but that US bond yields do react in anticipation of exchange rate movements, notably when these take place vis-à-vis major floating currencies. Last, the paper detects signs of nonlinearities in UIP at the medium-term horizon for dollar rates vis-à-vis some of the major floating currencies, albeit surrounded by some uncertainty.

Keywords: Uncovered interest parity, distant horizon, emerging economies, nonlinearities

JEL Classification: E43, F31, F41

Suggested Citation

Mehl, Arnaud and Cappiello, Lorenzo, Uncovered Interest Parity at Distant Horizons: Evidence on Emerging Economies & Nonlinearities (August 2007). ECB Working Paper No. 801. Available at SSRN: https://ssrn.com/abstract=1005122

Arnaud Mehl (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Lorenzo Cappiello

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 8765 (Phone)

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