Exchange Rate Behavior of Canada, Japan, the United Kingdom and the United States

Abstract

We revisit a significant research topic on exchange rate behavior by restating the test procedures with an appropriate econometric methodology to re-examine three aspects. (i) Does the inflation (price) factor affect nominal exchange rate? (ii) Do relative interest rates affect a country's exchange rate? (iii) Do the price and interest rate effects hold if controls for non-parity factors are embedded in tests? The quarterly data series for this study are taken over 55 years. The traditional parity condition model with price and interest rate as criterion variables is extended to take into account recently-verified non-parity factors, namely trade, productivity and foreign reserves. The results affirm that both parity factors and also the non-parity factors significantly affect the exchange rates of Canada, Japan, the United Kingdom and the United States. In our view, these findings relating to four free-floating currencies help extend our knowledge on how currency behavior is consistent with parity and non-parity theorems using a relevant methodological approach in this study.

Analysis of the Role of Exchange Rate Volatility in Monetary Policy Conduction in OECD Countries: Empirical Evidence from Panel-VAR Models

“…I used the variance decomposition analysis based on PVAR 1 model to determine the degree of importance of each variable included in the model. Table 1 shows that exchange rate volatility in PVAR 1 was of great importance for understanding the variations over the 36-month period, parallel to [9,21], implying that the PPP theory may be consistent. FEVDs revealed that changes in economic activity play an important role in the variations in exchange rate volatility in contrast to [5].…”

“…Factors affecting foreign exchange rates may depend on the level of development of countries, as well as on monetary and non-monetary factors. In other words, nominal and real factors can have considerable amount of impact on exchange rate volatility; the study by [9] can be regarded as a pioneering approach in that extent. [9] extended the traditional parity condition model by including non-parity factors, namely, trade, productivity and foreign reserves using panel techniques for quarterly data series over 55 years.…”

“…In other words, nominal and real factors can have considerable amount of impact on exchange rate volatility; the study by [9] can be regarded as a pioneering approach in that extent. [9] extended the traditional parity condition model by including non-parity factors, namely, trade, productivity and foreign reserves using panel techniques for quarterly data series over 55 years. [9] obtained outcomes supporting both purchasing power parity (PPP) and International Fisher Effect (IFE) theorems.…”

“…[9] extended the traditional parity condition model by including non-parity factors, namely, trade, productivity and foreign reserves using panel techniques for quarterly data series over 55 years. [9] obtained outcomes supporting both purchasing power parity (PPP) and International Fisher Effect (IFE) theorems. Moreover, the non-parity factors significantly influenced the exchange rates of Canada, Japan, the United Kingdom and the United States.…”

“…Moreover, the non-parity factors significantly influenced the exchange rates of Canada, Japan, the United Kingdom and the United States. In a similar approach to [1,9] analysed the factors which may affect the real exchange rate volatility. [1] also considered the role of both trade and financial openness to formulate the optimal combination of international trade and financial measures for lowering exchange rate volatility.…”