Uncovered interest parity: New Zealand' s post-deregulation experience

The uncovered interest parity (UIP) condition has been the subject of a considerable amount of research. Many of these studies, however, have either measured exchange rate expectations indirectly and/or have not considered the issue of data stationarity. Both of these issues have the potential to render tests of UIP problematical. This paper tests for the presence of UIP between New Zealand and four of its key trading partners using an approach that addresses both of the above issues. Strong evidence is found that UIP held between New Zealand and Australia in the period following the removal of capital controls, indicating that the capital markets of these two countries are now highly integrated.