Template-Type:	ReDIF-Article 1.0
Author-Name: Mohamed Ariff
Author-Workplace-Name:	Bond University, Qld 4229, Australia
Author-Name: Alireza Zarei
Author-Workplace-Name:	University Putra Malaysia, Serdang, Selangor, Malaysia
Author-Email: mariff@bond.edu.au
Title: Parity Theorems Revisited: An ARDL Bound Test with Non-Parity Factors
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.
Classification-JEL:
Keywords: ARDL, bound test, exchange rate, prices, interest rates, speed of adjustment,
non-parity factors 
Journal: Asian Academy of Management Journal of Accounting and Finance
Pages: 1-26
Volume: 11
Issue: 1
Year: 2015
File-URL:http://web.usm.my/journal/aamjaf/vol%2011-1-2015/AAMJAF%2011(1)%202015-Art.%201(1-26).pdf
File-Format: Application/pdf
Handle: RePEc:usm:journl:aamjaf01101_1-26