Exchange Rate Behavior of Canada, Japan, the United Kingdom and the United States

M. Ariff, A. Zarei

Research output: Contribution to journalArticle

5 Citations (Scopus)

Abstract

We revisit a significant research topic on exchange rate behavior by restating the test procedures with an appropriate econometric methodology to re-examine three aspects. (i) Does the inflation (price) factor affect nominal exchange rate? (ii) Do relative interest rates affect a country’s exchange rate? (iii) Do the price and interest rate effects hold if controls for non-parity factors are embedded in tests? The quarterly data series for this study are taken over 55 years. The traditional parity condition model with price and interest rate as criterion variables is extended to take into account recently-verified non-parity factors, namely trade, productivity and foreign reserves. The results affirm that both parity factors and also the non-parity factors significantly affect the exchange rates of Canada, Japan, the United Kingdom and the United States. In our view, these findings relating to four free-floating currencies help extend our knowledge on how currency behavior is consistent with parity and non-parity theorems using a relevant methodological approach in this study.
Original languageEnglish
Pages (from-to)341-357
Number of pages17
JournalOpen Economies Review
Volume27
Issue number2
Early online date27 Aug 2015
DOIs
Publication statusPublished - Apr 2016
Externally publishedYes

Bibliographical note

The final publication is available at Springer via http://dx.doi.org/10.1007/s11079-015-9372-x
Copyright © and Moral Rights are retained by the author(s) and/ or other copyright owners. A copy can be downloaded for personal non-commercial research or study, without prior permission or charge. This item cannot be reproduced or quoted extensively from without first obtaining permission in writing from the copyright holder(s). The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the copyright holders.

Keywords

  • Exchange rates
  • Non-parity factors
  • Panel cointegration
  • Dynamic OLS
  • Mean group
  • Pooled mean group

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