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- Title
Uncovered interest parity and behavior of interest differentials.
- Authors
Muñoz Mendoza, Jorge A.; Sepúlveda Yelpo, Sandra M.; Veloso Ramos, Carmen L.; Delgado Fuentealba, Carlos L.
- Abstract
We analyze the relationship between exchange returns and interest rate differentials through Uncovered Interest Parity (UIP). We use a sample of 83 countries for 1980-2015 period, organizing the information into a panel data structure. The fixed-effects regressions show that the UIP is not fulfilled. However, we observe that the effect of interest rate differential on foreign exchange returns is non-linear. The non-linearity shape suggests that UIP have a lower bias in countries with high interest rate differentials, usually over 38 %. Even quartiles regressions show that the positive relationship between exchange rate returns and interest rate differentials would be observed when these variables experience high variations. These results are relevant for monetary and exchange policies design and for investment decisions on exchange markets
- Subjects
INTEREST rates; FOREIGN exchange rates; RATE of return; PREDICTION markets; MONETARY policy
- Publication
Mexican Journal of Economics & Finance / Revista Mexicana de Economia y Finanzas, 2020, Vol 15, Issue 2, p173
- ISSN
1665-5346
- Publication type
Article
- DOI
10.21919/remef.v15i2.399