ONE APPROACH TO RESOLVE THE EXCHANGE RATE PUZZLE: RESULTS USING DATA FROM THE UNITED KINGDOM AND THE UNITED STATES

Mohamed Ariff () and Alireza Zarei ()
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Alireza Zarei: #x2021;Sunway University, Jalan Universiti, Bandar Sunway, 47500 Petaling Jaya, Selangor, Malaysia

The Singapore Economic Review (SER), 2018, vol. 63, issue 05, 1367-1384

Abstract: 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.

Keywords: Exchange rate; non-parity factors; prices; interest rates; panel cointegration; dynamic OLS (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1142/S0217590816500090

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