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Parity Theorems Revisited: An ARDL Bound Test with Non-Parity Factors

Author

Listed:
  • Mohamed Ariff

    (Bond University, Qld 4229, Australia)

  • Alireza Zarei

    (University Putra Malaysia, Serdang, Selangor, Malaysia)

Abstract

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.

Suggested Citation

  • Mohamed Ariff & Alireza Zarei, 2015. "Parity Theorems Revisited: An ARDL Bound Test with Non-Parity Factors," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 11(1), pages 1-26.
    • Handle: RePEc:usm:journl:aamjaf01101_1-26
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    Cited by:

    1. Christina Anderl & Guglielmo Maria Caporale, 2021. "Nonlinearities and asymmetric adjustment to PPP in an exchange rate model with inflation expectations," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 49(6), pages 937-959, August.

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