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An Empirical Study on the Long-Run Determinants of Exchange Rate

Author

Listed:
  • I-Ming Chiu

    (Department of Economics, Rutgers University, 311 North 5th Street, Camden, NJ 08102, USA)

Abstract

The behavior of exchange rates has been an important issue in the international finance literature. Although exchange rate is erratic and unpredictable in the short run, its long-run behavior is believed to be guided by economic fundamentals. This paper empirically tests the long-run determinants of the exchange rate by focusing on the Taiwan/US case. After incorporating productivity differential, foreign reserves, and monetary base in the absolute Purchasing Power Parity (PPP) proposition, where the relative price is the only determinant of the exchange rate, the Johansen's maximum likelihood test results indicate these determinants and the exchange rate are indeed cointegrated: thus a long-run relationship can be established.

Suggested Citation

  • I-Ming Chiu, 2008. "An Empirical Study on the Long-Run Determinants of Exchange Rate," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 11(03), pages 389-409.
    • Handle: RePEc:wsi:rpbfmp:v:11:y:2008:i:03:n:s0219091508001398
    DOI: 10.1142/S0219091508001398
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    Citations

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    Cited by:

    1. Jungshik Hur & Vivek Singh, 2013. "Does long-term disequilibrium in stock price predict future returns?," Review of Quantitative Finance and Accounting, Springer, vol. 41(4), pages 753-767, November.
    2. Works, Richard Floyd, 2016. "Econometric modeling of exchange rate determinants by market classification: An empirical analysis of Japan and South Korea using the sticky-price monetary theory," MPRA Paper 76382, University Library of Munich, Germany.
    3. Angelos Kanas & Angelos Kotios & Panagiotis D. Zervopoulos, 2019. "Semi-parametric real exchange rates dynamics," Review of Quantitative Finance and Accounting, Springer, vol. 52(2), pages 643-656, February.
    4. Roland Füss & Denis Schweizer, 2012. "Short and long-term interactions between venture capital returns and the macroeconomy: evidence for the United States," Review of Quantitative Finance and Accounting, Springer, vol. 38(3), pages 391-410, April.
    5. Luke Lin & Chun I. Lee, 2016. "Central Bank Intervention, Exchange Rate Regime and the Purchasing Power Parity," The World Economy, Wiley Blackwell, vol. 39(8), pages 1256-1274, August.

    More about this item

    Keywords

    Purchasing power parity; exchange rate determinants; cointegration; Johansen test; F31; F41;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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