The Economics of Uncovered Interest Parity Condition for Emerging Markets: A Survey

of new data, these risks can be incorporated appropriately.

Last but not the least, we would also like to emphasize the following points: The choice
of the base currency may have different implications for deviations from the UIP condition
for different regions. Testing for the UIP condition under different inflation episodes, i.e.
high and not-so-high inflation, may also be important. Asymmetricity deserves a special
emphasis, as higher (possibly extreme) interest differentials are more likely to reflect market
perception of risk towards these economies. Finally, due to the contagious nature of financial
crises, international investors may not differentiate between emerging markets, and therefore
deviations from the UIP condition for an emerging market may have an impact on others.

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