Expectations of Exchange Rates and Differential Inflation Rates

Roger D Huang

Journal of Finance, 1987, vol. 42, issue 1, 69-79

Abstract: The paper tests the null hypothesis of ex ante purchasing power parity. The empirical evidence obtained is inconsistent with the null for major industrialized countries over the current floating exchange-rate regime. Expected nominal exchange rate changes appear to deviate systematically from expected inflation-rate differentials over the same holding period even though real exchange-rate changes appear to be serially uncorrelated. This supports the presence of time-varying risk premium in foreign exchange markets and real determinants of exchange-rate movements as suggested by equilibrium theories of international asset markets. Copyright 1987 by American Finance Association.

Date: 1987
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