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International Parities and Exchange Rate Determination

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  • Zhao, Yan

Abstract

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.

Suggested Citation

  • Zhao, Yan, 2005. "International Parities and Exchange Rate Determination," MPRA Paper 36967, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:36967
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    References listed on IDEAS

    as
    1. Isard, Peter, 1977. "How Far Can We Push the "Law of One Price"?," American Economic Review, American Economic Association, vol. 67(5), pages 942-948, December.
    2. 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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    More about this item

    Keywords

    Exchange rate; PPP; UIP;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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