Parity theorems revisited: An ARDL bound test with non-parity factors

Mohamed Ariff, Alireza Zarei

Research output: Contribution to journalArticleResearchpeer-review

1 Citation (Scopus)

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.

Original languageEnglish
Pages (from-to)1-26
Number of pages26
JournalAsian Academy of Management Journal of Accounting and Finance
Volume11
Issue number1
Publication statusPublished - 1 Jan 2015
Externally publishedYes

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Autoregressive distributed lag model
Bounds test
Parity
Exchange rates
Factors
Interest rates
Econometrics
Long-run relationship
Appropriateness
Coefficients
Factor prices
Currency
US economy
Error correction
Inflation rate
Econometric models

Cite this

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Parity theorems revisited : An ARDL bound test with non-parity factors. / Ariff, Mohamed; Zarei, Alireza.

In: Asian Academy of Management Journal of Accounting and Finance, Vol. 11, No. 1, 01.01.2015, p. 1-26.

Research output: Contribution to journalArticleResearchpeer-review

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