ABSTRACT
Although the study of the uncovered interest parity condition (UIP) has been somewhat thrown into the shade by the extensive literature on foreign exchange market efficiency, the former merits some more interest, for at least two reasons: first, because of its role as a key behavioural relationship in most of today’s macroeconometric and theoretical models of open economies,1 and, secondly, because of its relevance for the explanation of the crisis within the European Monetary System (EMS) which occurred in August 1993. Regarding the latter point, a generally held view is that the high German interest rates were responsible for the pressure in the EMS, because of the conflict between economic and monetary policy in the other countries participating in the Exchange Rate Mechanism (ERM).
