Uncovered interest parity with switching regimes

We develop formulas for testing UIP with Markov-switching VAR models in which all the parameters are regime-dependent. The formulas are extensible to other contexts where rational expectations intervene in non-linear bivariate Switching-VAR models of the type considered here. The testing procedure is implemented on several samples of data for the post-1973 free floating period (Spain-United Kingdom, Germany-United States). Contrary to most of the received evidence - mainly obtained with linear and therefore probably misspecified models - the results for these developed countries are favourable to the UIP, especially in the case of Spain-United Kingdom after the entrance of Spain in the EU. The econometric methodology proposed offers therefore an explanation for the empirical UIP puzzle.