Does the uncovered interest parity hold better in korea?

초록

In this paper, we observe that while the Uncovered Interest Parity (UIP) condition in Korea was frequently violated until the end of the Global Financial Crisis (GFC), it has increasingly been upheld in more recent years. Using a time-varying coefficient vector autoregressive (TVC-VAR) model, we provide explanations for this finding. First, the impact of global risk shocks, proxied by exogenous increases in the VIX index, on the UIP premium has decreased since the Global Financial Crisis, contributing to the resurgence of the UIP condition. Second, while the exchange rate becomes less responsive to global risk shocks over time, it shows increased sensitivity to shocks in the interest rate differential. This heightened responsiveness has more immediately narrowed the deviations from the UIP condition. In addition, our findings highlight that high global risk around the GFC led to significant short-run capital outflows. Conversely, in the period following the mid-2010s, such capital outflows have not been significant in response to rises in the VIX. This reversal indicates a notable change in the dynamics of global risk impacts on Korea's financial flows.

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