DP2943 Uncovered Interest Parity in Crisis: The Interest Rate Defence in the 1990s

Author(s): Robert P Flood , Andrew K Rose

Publication Date: September 2001

Keyword(s): empirical , exchange rate , fixed , floating , developing , developed

JEL(s): F32 , G15

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP2943.asp

This Paper tests for uncovered interest parity (UIP) using daily data for twenty-three developing and developed countries through the crisis-strewn 1990s. We find that UIP works better on average in the 1990s than in previous eras in the sense that the slope coefficient from a regression of exchange rate changes on interest differentials yields a positive coefficient (which is sometimes insignificantly different from unity). UIP works systematically worse for fixed and flexible exchange rate countries than for crisis countries, but we find no significant differences between rich and poor countries. Finally, we find evidence that varies considerably across countries and time, but is usually weakly consistent with an effective ‘interest rate defense’ of the exchange rate.