One approach to resolve the exchange rate puzzle results using data from the United Kingdom and the United States

Date of this Version


Document Type

Journal Article

Publication Details

Citation only

Ariff, M., & Zarei, A. (2016). One approach to resolve the exchange rate puzzle results using data from the united kingdom and the united states. The Singapore Economic Review, 61(1), 1-18.

Access the journal

© World Scientific Publishing Company, 2016




We approach a significant research topic in international economics by restating the test procedures in a novel manner consistent with monetary theorems with controls using monetary variables and applying an appropriate econometric methodology to re-examine three aspects of exchange rate behavior. (i) Does the inflation (price) factor affect Nominal Exchange Rate (NER)? (ii) Do relative interest rates between countries 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 data series for this study are taken over 55 years covering pre-and-post-Bretton Woods era: a second test was done over the post-Bretton Woods period only using 30 years of data. Also, the traditional factors of parity conditions are extended in this research to take into account recently theorized and tested non-parity factors related to cash flows. The resulting evidence affirms clearly that both the parity factors (prices and interest rates) and the non-parity factors affect exchange rates significantly over the long run, also over the 30-year period. In our view, these findings extend our knowledge of how currency behavior is consistent with parity and non-parity theorems

This document is currently not available here.



This document has been peer reviewed.