Abstract
The research question addressed in this paper is, do inflation and interest rate differences across two major economies fully drive the long-run exchange rate changes if controls for non-parity factors are embedded? Exchange rate behaviour research is once again a interesting topic given the availability of powerful econometric approaches to resolve unsolved issues. We re-examine the exchange rate behaviour of the US economy,
applying a more appropriate econometric model using 55 years of quarterly data. The model explains 96% of variation in exchange rates, which testifies to the model’s appropriateness. The error correction estimate indicates a time-to-equilibrium of 0.139
per quarter; that is, full adjustment takes seven quarters. Tests indicate evidence of a long-run relationship among the exchange rate, prices, and interest rates. The coefficients on both parity factors (prices and interest rates) are statistically significant
with correct theory-suggested signs. These findings constitute strong evidence in support of parity and non-parity theorems while confirming that the US currency behaviour over
1960–2014 is consistent with parity and non-parity theories.
applying a more appropriate econometric model using 55 years of quarterly data. The model explains 96% of variation in exchange rates, which testifies to the model’s appropriateness. The error correction estimate indicates a time-to-equilibrium of 0.139
per quarter; that is, full adjustment takes seven quarters. Tests indicate evidence of a long-run relationship among the exchange rate, prices, and interest rates. The coefficients on both parity factors (prices and interest rates) are statistically significant
with correct theory-suggested signs. These findings constitute strong evidence in support of parity and non-parity theorems while confirming that the US currency behaviour over
1960–2014 is consistent with parity and non-parity theories.
| Original language | English |
|---|---|
| Pages (from-to) | 1-26 |
| Number of pages | 26 |
| Journal | Asian Academy of Management Journal of Accounting and Finance |
| Volume | 11 |
| Issue number | 1 |
| Publication status | Published - 2015 |
| Externally published | Yes |
Bibliographical note
CC-BY All articles published in Asian Academy of Management Journal of Accounting and Finance are licensed under a Creative Commons Attribution 4.0 International License.Keywords
- ARDL
- bound test
- exchange rate
- prices
- interest rates
- speed of adjustment
- non-parity factors