International Parities and Exchange Rate Determination

Zhao, Yan (2005): International Parities and Exchange Rate Determination.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange rate; PPP; UIP
• Subjects: F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

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Johansen, Soren and Katarina Juselius (1992), “Testing Structural Hypothesis in a Multivariate Cointegration Analysis of the PPP and the UIP for the UK,” Journal of Econometrics 53: 211-44.