Uncovered Interest Parity

Abstract

This Working IlUI)l'r should not be reported as represE'nting the views of the IMF.The views ex pres~d in this Work ing Paper arc those of the atl thor(s~ and do not necessarily represent those of the IMF or 1i\,t F policy.Worki ng Papers describe re~ar(' h in prog ress by the author(s) and are I pubr i ~hcd to elicit (,O tlltnC nt ~ and \0 fun her de bate.Th is pape r pro vides an overview of the uncovered interest parity assumpt ion.It traces the history of the interest parity concept.sum mari zes ev idence on the empi rica l valid it y of ullcovered interest parity.and discusses different interpretations of the evidence and the implicat ions for macroeconomic ;:lIlalys is.Th e uncovered interest parity assumption has been an important building block in Illult ipcriod models of open econom ies.and al though its validity is st rongly chall enged by the empi rica l evidence.at least at short time horizons.it s retention in macroeconomic models is supported on pragm:llic grounds by the lack of much empirical SllPPOl1 for ex isting models o f the cxch::lIlge risk premium .

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