One approach to resolve the exchange rate puzzle: results using data from the United Kingdom and the United States

M Ariff, A Zarei

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We approach a significant research topic in international economics by restating the test procedures in a novel manner consistent with monetary theorems with controls using monetary variables and applying an appropriate econometric methodology to re-examine three aspects of exchange rate behavior. (i) Does the inflation (price) factor affect Nominal Exchange Rate (NER)? (ii) Do relative interest rates between countries 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 data series for this study are taken over 55 years covering pre-and-post-Bretton Woods era: a second test was done over the post-Bretton Woods period only using 30 years of data. Also, the traditional factors of parity conditions are extended in this research to take into account recently theorized and tested non-parity factors related to cash flows. The resulting evidence affirms clearly that both the parity factors (prices and interest rates) and the non-parity factors affect exchange rates significantly over the long run, also over the 30-year period. In our view, these findings extend our knowledge of how currency behavior is consistent with parity and non-parity theorems.
Original languageEnglish
Pages (from-to)1367-1384
Number of pages8
JournalSingapore Economic Review
Issue number5
Early online date21 Jan 2016
Publication statusPublished - 2018
Externally publishedYes

Bibliographical note

Electronic version of an article published as Singapore Economic Review, vol. 63, no. 5, pp. 1367-1384. © copyright World Scientific Publishing Company.

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.


  • Exchange rate
  • Non-parity factors
  • Prices
  • Interest rates
  • Panel cointegration
  • Dynamic OLS


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