Parity Theorems Revisited: An Ardl Bound Test With Non-parity Factors
The research question addressed in this paper is, do inflation and interest rate differences across two major economies fully drive the long-run exchange rate changes if controls for non-parity factors are embedded? Exchange rate behaviour research is once again an interesting topic given the ava...
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| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
Asian Academy of Management (AAM)
2015
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| Subjects: | |
| Online Access: | http://eprints.usm.my/40028/1/AAMJAF_11%281%29_2015-Art._1%281-26%29.pdf http://eprints.usm.my/40028/ http://web.usm.my/journal/aamjaf/11-1-1-2015.html |
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| Summary: | The research question addressed in this paper is, do inflation and interest rate differences
across two major economies fully drive the long-run exchange rate changes if controls
for non-parity factors are embedded? Exchange rate behaviour research is once again an
interesting topic given the availability of powerful econometric approaches to resolve
unsolved issues. We re-examine the exchange rate behaviour of the US economy,
applying a more appropriate econometric model using 55 years of quarterly data. The
model explains 96% of variation in exchange rates, which testifies to the model’s
appropriateness. The error correction estimate indicates a time-to-equilibrium of 0.139
per quarter; that is, full adjustment takes seven quarters. Tests indicate evidence of a
long-run relationship among the exchange rate, prices, and interest rates. The
coefficients on both parity factors (prices and interest rates) are statistically significant
with correct theory-suggested signs. These findings constitute strong evidence in support
of parity and non-parity theorems while confirming that the US currency behaviour over
1960–2014 is consistent with parity and non-parity theories |
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