Uncovered Interest Parity: Cross-Sectional Evidence

Abstract

Uncovered interest parity (UIP) is estimated for short-term horizons from one month to 12 months using a large number of cross-sectional bilateral exchange rates. In contrast to conventional time-series UIP, cross-sectional UIP is examined with a single-equation estimation and panel regression model estimation. The exchange rates analyzed here include a broad spectrum of countries: developed, developing, low-inflation, and high-inflation countries. Based on the empirical evidence, there does not appear to be a well-publicized UIP puzzle for cross-sectional UIP, and the slope estimates remain largely between zero and one throughout the sample periods, with a few exceptions. Evidence of UIP is more clear for low inflation countries than for high inflation countries. As interest rate maturity becomes longer from one month to 12 months, the UIP relationship becomes weaker.