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Exchange rate uncertainty and deviations from Purchasing Power Parity: Evidence from the G7 area

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Abstract

Arghyrou, Gregoriou and Pourpourides (2009) argue that exchange rate uncertainty causes deviations from the law of one price. We test this hypothesis on aggregate data from the G7-area. We find that exchange rate uncertainty explains to a significant degree deviations from Purchasing Power Parity.

Suggested Citation

  • Arghyrou, Michael G & Gregoriou, Andros & Pourpourides, Panayiotis M., 2009. "Exchange rate uncertainty and deviations from Purchasing Power Parity: Evidence from the G7 area," Cardiff Economics Working Papers E2009/23, Cardiff University, Cardiff Business School, Economics Section.
  • Handle: RePEc:cdf:wpaper:2009/23
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    1. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-858, May.
    2. Sarno,Lucio & Taylor,Mark P., 2003. "The Economics of Exchange Rates," Cambridge Books, Cambridge University Press, number 9780521485845.
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    Keywords

    Purchasing power parity; exchange rate uncertainty;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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