International Parities and Exchange Rate Determination
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.
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- Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
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