Uncovered Interest Parity: Cross-sectional Evidence

This paper proposes a di¤erent empirical approach to estimate the UIP by analyzing a large number of cross-country bilateral exchange rates using cross-section analysis. Di¤erent from conventional time-series UIP, cross-sectional UIP is examined with single equation estimation and panel regression model estimation. The exchange rates analyzed here include a broad spectrum of countries: developed, developing, low in‡ation and high in‡ation 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 in‡ation countries than for high in‡ation countries. As interest rate maturity becomes longer, UIP relationship becomes weaker. Keywords: Uncovered interest parity, Cross-section UIP JEL classi…cation: F31, F41, G15 This paper is greatly bene…tted by numerous comments from my colleague, Nelson Mark.