Uncovered Interest Parity and Monetary Policy Freedom in Countries with the Highest Degree of Financial Openness

Abstract

This study reviews the uncovered interest parity hypothesis in perfectly open economies. To meet the assumption of perfect capital mobility, we only include countries and periods with the highest degree of capital account openness in the sample. Using several specifications from the restricted to the less restricted models, we estimate the relationship among exchange rate, domestic and benchmark interest rates. Regardless of the exchange rate regime, we find evidence that domestic interest rate is highly sensitive to international interest rate. Therefore, monetary policy independence would be affected.