Equilibrium exchange rate determination and multiple structural changes

Cerrato, Mario; Kim, Hyunsok; MacDonald, Ronald

doi:10.1016/j.jempfin.2013.03.001

Cited by 5 publications

(3 citation statements)

References 27 publications

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“…The long-run PPP between Canada and the US displays mixed experimental evidence (Crowder, 1996;Campbell & Lapham, 2001;Rao et al, 2004;Anderson et al, 2003). The PPP theory continues hold the attention of researchers due to its effects both on theoretical exchange rate determination frameworks (Cerrato et al, 2013) as well as for practical comparative exchange rate policy-making models (Engel et al, 2012). By employing a fractionally integrated process the Engle-Granger two step method of cointegration permits divergence from equilibrium.…”

Section: Contribution To Current Literaturementioning

confidence: 99%

An Empirical Test of Purchasing Power Parity Theory for Canadian Dollar-US Dollar Exchange Rates

Al-Zyoud¹

2015

IJEF

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The paper examines the long run movement between Canadian dollar and US dollar exchange rates. The study uses monthly data for the period 1995:01 to 2008:08 and employs the Engle-Granger cointegration test. Our analysis suggests that the absolute purchasing power parity (PPP) does not hold, indicating no long run relationship between the observed exchange rate and PPP rate. The result shows that there is no cointegration between actual exchange rate and PPP rate, suggesting that there is no long run relationship between Canadian dollar and US dollar exchange rates. A close examination of the data shows that output prices move more slowly, and is evidence against PPP in the short run. We acknowledge that the study period may be small to capture the existence of a long run relationship. However, our regression analysis suggests that the relative price movements are significant in explaining the actual exchange rate between US and Canada.

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Section: Contribution To Current Literaturementioning

confidence: 99%

An Empirical Test of Purchasing Power Parity Theory for Canadian Dollar-US Dollar Exchange Rates

Al-Zyoud¹

2015

IJEF

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“…The speed at which the function moves between 1 and 1 changes with . As discussed in Cerrato et al (2010), this model is able to capture structural changes taking place in di¤erent regimes. If c 1 < c 2 , 0 < S t ( ) < 1 when t = c 1 T , and 1 < S t ( ) < 0 when t = c 2 T .…”

Section: A Structural Change Modelmentioning

confidence: 99%

Microstructure order flow: statistical and economic evaluation of nonlinear forecasts

Cerrato

Kim

MacDonald

2015

Journal of International Financial Markets, Institutions and Mo

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In this paper we propose a novel empirical extension of the standard market microstructure order ‡ow model. The main idea is that heterogeneity of beliefs in the foreign exchange market can cause model instability and such instability has not been fully accounted for in the existing empirical literature. We investigate this issue using two di¤erent data sets and focusing on out-of-sample forecasts. Forecasting power is measured using standard statistical tests and, additionally, using an alternative approach based on measuring the economic value of forecasts after building a portfolio of assets. We …nd there is a substantial economic value on conditioning on the proposed models.JEL Classi…cation:F31; F41; G10

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“…The interest in PPP rests on its practical application to comparative exchange rate policy-making models (Engel et al, 2012. ) and theoretical exchange rate determination frameworks (Cerrato et al, 2013). In most cases, empirical findings on the validity of PPP depends on the variant of PPP used -absolute PPP (aPPP) or relative PPP (rPPP).…”

Section: Introductionmentioning

confidence: 99%

Purchasing Power Parity Approach to Exchange Rate Misalignment in Nigeria

Nakorji¹,

Agboegbulem²,

Gaiya³

et al. 2021

CBN-JAS

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This study examines the purchasing power parity (PPP) approach to the determination of exchange rate misalignment in Nigeria by using two variants of the PPP: the absolute PPP (aPPP) and the relative PPP (rPPP). Data on the Nigerian Naira to US Dollar ( N/$), British Pound ( N/£) and Chinese Yuan (N /¥) interbank exchange rates, Nigeria consumer price index and Inflation as well as the US, UK and China consumer price indices and inflation rates spanning 2008:M1 to 2018:M12 were utilized. A recently modified fractional cointegration framework was employed, taking care of smooth structural breaks and nonlinearity, while the unit root tests employed the fractional alternatives. The results confirmed that the aPPP approach to exchange rate determination is unrealistic but revealed empirical support for the rPPP approach. Furthermore, the exchange rates computed with the rPPP approach show that the interbank Naira to US Dollar, UK Pounds and Chinese Yuan exchange rates were overvalued in most of the period of this study. The period of undervaluation observed in June 2016 and April 2017 coincided with the periods when CBN introduced the investors and exporters window. The study recommends the use of rPPP for gauging the level of exchange rate misalignment in Nigeria and suggests the need to diversify the export base to appreciate the exchange rate.

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Equilibrium exchange rate determination and multiple structural changes

Cited by 5 publications

References 27 publications

An Empirical Test of Purchasing Power Parity Theory for Canadian Dollar-US Dollar Exchange Rates

An Empirical Test of Purchasing Power Parity Theory for Canadian Dollar-US Dollar Exchange Rates

Microstructure order flow: statistical and economic evaluation of nonlinear forecasts

Purchasing Power Parity Approach to Exchange Rate Misalignment in Nigeria

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