International Parities and Exchange Rate Determination

Yan Zhao

MPRA Paper from University Library of Munich, Germany

Abstract: The model of equilibrium exchange rate combining purchasing power parity (PPP) and uncovered interest parity (UIP) is widely tested using the cointegration approach. Most of the recent studies, however, are deficient in the treatment of expectations and the power of tests. This paper aims at resolving the two deficiencies by deriving and testing the yen/dollar exchange rate model. Perfect foresight is assumed to circumvent the expectation problem and a modification of cointegration variables is introduced to improve the power of tests.

Keywords: Exchange rate; PPP; UIP (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2005-03-31
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