THE UNCOVERD INTEREST PARITY PUZZLE (UIP): EVIDENCE FROM MAJOR CURRENCIES

Athanasios PETSAS

MSc. Hellenic Open University

apetsa@tee.gr

Theodoros PELAGIDIS

Professor, University of Piraeus & NR Senior Fellow, Brookings Institution, US. 21, Lambraki str., GR-18533

pelagidi@unipi.gr

Abstract

This paper investigates empirically the Uncovered Interest Parity puzzle, highlighting the weak relationship between exchange rates and interest rates in particular, using data for the exchange and interest rates from four countries, in different time horizons, running from 3 to 60 months. The analysis in particular focuses on the deviations from rational expectations as a possible explanation of the UIP puzzle.

Keywords: UIP, PPP, Exchange rates

JEL classification: F41, Macro focus

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