Uncovered interest parity at distant horizons: evidence on emerging economies & nonlinearities

Lorenzo Cappiello and Arnaud Mehl

No 801, Working Paper Series from European Central Bank

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 mediumterm horizon for dollar rates vis-à-vis some of the major floating currencies, albeit surrounded by some uncertainty. JEL Classification: E43, F31, F41

Keywords: distant horizon; emerging economies; Nonlinearities; Uncovered interest parity (search for similar items in EconPapers)
Date: 2007-08
Note: 234084
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2007801

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