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Purchasing Power Parity and Interest Parity in the Laboratory

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  • Eric O' N. Fisher

Abstract

This paper analyzes purchasing power parity and uncovered interest parity in the laboratory. It finds strong evidence that purchasing power parity, covered interest parity, and uncovered interest parity hold. Subjects are endowed with an intrinsically useless (green) currency that can be used to purchase another useless (red) currency. Green goods can be bought only with green currency, and red goods can be bought only with red currency. The foreign exchange markets are organized as call markets. In the treatment analyzing purchasing power parity, the price of the red good varies. In a second treatment, the interest rate on red currency varies. In a third treatment, the interest rate on red currency varies, and the price of the red good is random.

Suggested Citation

  • Eric O' N. Fisher, 2001. "Purchasing Power Parity and Interest Parity in the Laboratory," ISER Discussion Paper 0531, Institute of Social and Economic Research, The University of Osaka.
    • Handle: RePEc:dpr:wpaper:0531
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    File URL: https://www.iser.osaka-u.ac.jp/static/resources/docs/dp/2001/dp0531.pdf
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    References listed on IDEAS

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    1. Fisher, Eric O'N., 2008. "Experiments with Arbitrage Across Assets," Handbook of Experimental Economics Results, in: Charles R. Plott & Vernon L. Smith (ed.), Handbook of Experimental Economics Results, edition 1, volume 1, chapter 31, pages 256-259, Elsevier.
    2. Arifovic, Jasmina, 1996. "The Behavior of the Exchange Rate in the Genetic Algorithm and Experimental Economies," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 510-541, June.
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    Cited by:

    1. Morrison, Michael & Fontenla, Matías, 2017. "Purchasing power parity across eight worlds," Economics Letters, Elsevier, vol. 158(C), pages 62-66.
    2. von Hagen, Jürgen & Kube, Sebastian & Selten, Reinhard & Pope, Robin, 2006. "Experimental Evidence on the Benefits of Eliminating Exchange Rate Uncertainties and Why Expected Utility Theory causes Economists to Miss Them," Bonn Econ Discussion Papers 28/2006, University of Bonn, Bonn Graduate School of Economics (BGSE).
    3. Eric Fisher, 2004. "Exploring Elements of Exchange Rate Theory in a Controlled Enivronment," Levine's Bibliography 122247000000000199, UCLA Department of Economics.
    4. John Duffy, 2008. "Macroeconomics: A Survey of Laboratory Research," Working Paper 334, Department of Economics, University of Pittsburgh, revised Jun 2014.
    5. Baboo M Nowbutsing, 2012. "Experiments in International Economics," Journal of Economics and Behavioral Studies, AMH International, vol. 4(2), pages 75-86.

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