The reasonableness of the uncovered interest rate parity theoty in explaining the fluctuations of the euro-dollar exchange rate : an empirical study for the period 1999-2019

Abstract EN

This paper examines the reliability of the uncovered interest rate parity (UIP) theory in explaining the fluctuations in the Euro/Dollar exchange rate for the period of 1999 (Q1)-2019 (Q4) using the analytical method, the ARDL approach for cointegration and the Granger causality test.

The analysis of the relationship between the real Euro/Dollar exchange rate and the interest rate differentials between the US and the Euro area showed that there is a deviation from the parity condition in some sub-periods.

As for the results of the empirical study, the results of the bounds test proved the existence of a long-run relationship between variables.

However, the results of the estimated ARDL model revealed that the UIP holds only on the short horizon, which was confirmed by Granger's causality test results.

As the UIP did not hold in the long run, this indicates that there are some obstacles and some controls imposed on the free movement of capital between the US and the Euro area.