Title : Does the Uncovered Interest Parity Hold in Korea?

Author : Joonyoung Hur(Sogang University), Kwanho Shin(Korea University)

In this paper, we find that while the UIP condition in Korea was widely violated until the end of the global financial crisis, it holds more tightly as time passes. Using a time-varying coefficient vector autoregressive (TVC-VAR) model, we provide explanations for this finding. First, the impact of a global risk shock, proxied by an exogenous increase in the VIX index, on the UIP premium has decreased since the global financial crisis (GFC), contributing to the resurrection of the UIP condition. Second, while the exchange rate becomes less responsive to a global risk shock, it responds more sensitively to a shock in the interest rate differential in a more recent period. In addition, our findings suggest that elevated global risk around the GFC yields significant short-run outflows of the total flow component. This pattern, however, is reversed for the subsequent period as no significant outflows of the total flow component are associated with increases in the VIX from the mid-2010s until recent periods.