14 Most studies on uncovered interest parity in developing countries relate to Latin America in the late 1970s and early 1980s, when exchange rate policy and interest policy was aimed at limiting inflation. Moreover, substantial government external borrowing was used to support the exchange rate policy and large capital flight oc=irred (See for example, World Bank, Wodld ievgIgpmenBI 1985, and Dooley, Helke, Tryon and Underwood for estimates). The results, discussed below, suggest that in this period the uncovered interest parity equation, (1), holds only by adding a substantial risk premium that varies to reflect the expectation of a devaluation that did not actually occur for a long period - the "peso problem" mentioned above.

For Argentina, Blejer shows that during the period of preannounced exchange rates (1977-1981) the difference between 30 day peso interest rates and Eurodollar rates at the end of the month, adjusted for the actual change in the spot exchange rate over the month, was equal to a (statistically significant) constant ( which could be interpreted as the average risk premium, plus 'white" noise. However, data in Calvo suggest that there was a large "spike" in the premium as the preannouncement period came to a close, which may make it difficult to draw conclusions econometrically from this period. Lizondo obtains a similar result for Mexico during the period May 1977 through December 1980, using the forward discount to measure expected depreciation. However, domestic interest rates as well as the exchange rate were fixed in this period, leading to some questions as to the result.

In Uruguay and Chile, estimates of the link between interest rates and international rates also have been made for the period of preannounced exchange rate depreciation; the results are somewhat different from Argentina in that in both countries the data suggest a relatively constant premium over the dollar interest rate, despite the preannounced slowing of the rate of depreciation, i.e., the actual depreciation does not appear to enter significantly. Hanson and De Melo show that during the period of preannounced exchange rates the domestic dollar rate was reflected roughly one-to-one in the peso deposit rate and the premium between domestic dollar and peso deposits (i.e. eliminating the country risk) was fairly large and constant, once adjustment is made for periods when low cost forward cover was available. Blejer and Gil also find a large serial correlation in the risk premium over uncovered interest parity. In Chile, for much of the period of the fixed exchange rate, the sitertion appears similar to Uruguay; the average difference between the local peso interest rate and LIBOR in dollars was 21 percentage points, with a standard error of 3 percentage points in the period 11/80-1/82 (See Edwards and Cox-Edwards Table 3-4 pg. 63, by comparison, the premium paid by Chilean borrowers in dollars on international markets over LIBOR averaged only about 1 percentage point). One interpretation of the Uruguay and the Chilean data is that although the actual rate of depreciation did decline, there was a roughly offsetting increase in the risk of a large, sharp devaluation as the degree of overvaluation increased.

In Colombia, in contrast to the Southern Cone countries and Mexico, the exchange rate was not used as an anti-inflation instrument for long periods of time but legal capital controls existed. Once the interest rate on one domestic asset _(cer4flcados de deposito)_ was freed, the premium over the international interest rate, adjusted for actual depreciation, appears to be fairly constant for some time (World Bank, 1984).2 Although the opening of the capital markets in the Southern Cone had been intended to 0 **See Uan** and Edward, discuwed in the next section, for a sonewhat different **interprettion** of **the** Colombian data.