THE ECONOMICS OF UNCOVERED INTEREST PARITY CONDITION FOR EMERGING MARKETS: A SURVEY

Abstract

Financial account liberalizations since the second half of the 1980s paved way for the burgeoning literature that investigates foreign exchange market efficiency in emerg-ing markets via testing for the uncovered interest parity (UIP) condition. This paper provides a broad and critical survey on this recent literature as well as a general under-standing on the topic through reviewing the related literature on developed economies where recent methodological advances in time series econometrics have provided fa-vorable results, questioning the previously documented UIP puzzle. The literature on emerging markets suggests that these countries deserve a special treatment by taking into account the existence of additional types of risk premia, high inflation episodes, financial contagion, peso problem, simultaneity problem, asymmetricity, and the deter-mination of de facto structural breaks.

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