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Testing the interest-parity condition with Irving Fisher's example of Indian rupee and sterling bonds in the London financial market, 1869–1906

Published online by Cambridge University Press:  10 January 2019

Nils Herger
Nils Herger*
Affiliation:
Study Center Gerzensee
*
N. Herger, Study Center Gerzensee, Dorfstrasse 2, PO Box 21, 3115 Gerzensee, Switzerland, email: nils.herger@szgerzensee.ch.
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Abstract

Following the pioneering work of Irving Fisher, this article assesses the uncovered interest-parity (UIP) condition by comparing Indian interest and exchange rates during the 1869 to 1906 period. The Indian case provides a good example of the UIP condition, since Indian rupee and sterling bonds were simultaneously traded in the London financial market and subject to negligible default risks. Large deviations from the UIP condition arose when India suffered from pervasive levels of uncertainty about the future of its silver-based currency system. Otherwise, a relatively close correlation arises between sterling-to-rupee interest-rate differences and exchange-rate changes.

Keywords

IndiaIrving Fishersilver currencyuncovered interest parityUIP puzzle

JEL classification

N13: Europe: Pre-1913 F31: Foreign Exchange N23: Europe: Pre-1913
Type
Articles
Information
Financial History Review , Volume 26 , Issue 1 , April 2019 , pp. 21 - 42
Copyright
Copyright © European Association for Banking and Financial History e.V. 2019 

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Footnotes

This article has benefited from insightful comments by the editor and two anonymous referees. The usual disclaimer applies.

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