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Review of Middle East Economics and Finance

Ed. by Dibeh, Ghassan / Assaf, Ata / Cobham, David / Hakimian, Hassan / Henry, Clement M.

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1475-3693
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Uncovered Interest Rate Parity: The Turkish Evidence

Pelin Öge Güney
Published Online: 2018-07-20 | DOI: https://doi.org/10.1515/rmeef-2017-0025

Abstract

This paper presents an empirical investigation of the uncovered interest parity (UIP) between the Turkish Lira (TRY)/US Dollar (USD) and Turkish Lira/Euro (EUR). Our results do not provide evidence supporting the UIP hypothesis for either case. Moreover, the estimates imply causality from the TRY/USD exchange rate return to the interest rate differential. Accordingly, the Turkish Central Bank (CBRT) may respond by increasing the domestic interest rate to a depreciation of the TRY against the USD . By taking this type of action, it can be concluded that the CBRT tried to control capital movements. This result supports (McCallum, Bennett T. 1994. “A Reconsideration of the Uncovered Interest Parity Relationship.” Journal of Monetary Economics 33 (1): 105–132.)’s argument, which advances the behavior of the monetary policy as a reason for the failure of the UIP condition.

Keywords: uncovered interest parity; exchange rates; ARDL

JEL Classification: E4; E5

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About the article

Published Online: 2018-07-20


Citation Information: Review of Middle East Economics and Finance, Volume 14, Issue 2, 20170025, ISSN (Online) 1475-3693, DOI: https://doi.org/10.1515/rmeef-2017-0025.

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