The LKR/JPY Rate and the UIP
Nirmali H and Rajapakse R P C R, The LKR/JPY Rate and The UIP, Journal for Stuides in Management and Planning Vol3, Issue 4, EduPedia Publications (P) Ltd. pp131-143
13 Pages Posted: 6 Apr 2017
Date Written: March 5, 2017
Of the main theories that explore on Interest rates and exchange rates, Uncovered Interest Rate Parity (UIP) states that the interest rate differential is an unbiased predictor of the spot exchange rate changes. The impact on investors is that there would be no short term arbitrage profits. Studies based on the relationship between these two variables are rare for developing countries like Sri Lanka. Therefore in order to bridge that gap identified through search for literature, Autoregressive Distributed Lags method was employed here to test the UIP. Monthly data on exchange rates and three month risk free interest rates with regard to the selected major external trader, Japan for the period from 2001-2014 were used for this purpose. The findings reveal that UIP does not hold in the short run but there is evidence for UIP to hold in the long run for Sri Lanka.
Keywords: Autoregressive Distributed Lags (ARDL) Model, Exchange Rates, Interest Rates, Uncovered Interest Rate Parity (UIP), Unit root tests
JEL Classification: F31, F41, P45
Suggested Citation: Suggested Citation