Long-run Uncovered Interest Parity in Emerging Markets

Long-run uncovered interest rate parity (LRUIP) tends to hold for G10 currencies (Chinn & Meredith, 2004; Lustig, Stathopoulos, & Verdelhan, 2019). Focusing on the ten most freely floating emerging market currencies (EM10), we show that UIP does not hold even in the long run for emerging markets (EMs). However, when UIP regressions are augmented with measures of credit risk, LRUIP cannot be rejected statistically for these currencies.