Exchange Rate Uncertainty and the Law of One Price

William Maloney

Review of International Economics, 1999, vol. 7, issue 2, 328-41

Abstract: This paper develops a framework for analyzing the impact of exchange rate uncertainty on the Law of One Price. Using the prices of very disaggregated, homogeneous products in a very open economy, Chile, where no institutions exist for hedging exchange risk, it then tests the model in a bivariate GARCH in mean context. Little evidence is found that short-run exchange rate uncertainty constitutes a barrier to goods arbitrage. Copyright 1999 by Blackwell Publishing Ltd.

Date: 1999
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