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Abstract
Purchasing Power Parity and Interest Rate Parity are well established theories of exchange rate determination. Purchasing Power Parity is basically the law of one price, a basket of goods and services are priced in one country, and the same basket of goods and services are priced in another country and the exchange rate is determined based on the price of the commodity basket in each country. Interest Rate Parity is another theory which states that the Interest Rate Parity determines exchange rate. This paper finds that although Purchasing Power Parity and Interest Rate Parity are well established theories of exchange rate determination, there are other variables which are unique for each country for determining exchange rate for those individual countries. In the case of the US dollar it was found that there are some macrovariables which determine the exchange rate of the dollar against its major trading partners. Therefore we cannot say that exchange rate of every country in determined by Purchasing Power Parity or Interest Rate Parity alone. This paper finds that there are some macrovariables that determine the exchange rate of the dollar against some major currencies.
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Abstract
Purchasing Power Parity and Interest Rate Parity are well established theories of exchange rate determination. Purchasing Power Parity is basically the law of one price, a basket of goods and services are priced in one country, and the same basket of goods and services are priced in another country and the exchange rate is determined based on the price of the commodity basket in each country. Interest Rate Parity is another theory which states that the Interest Rate Parity determines exchange rate. This paper finds that although Purchasing Power Parity and Interest Rate Parity are well established theories of exchange rate determination, there are other variables which are unique for each country for determining exchange rate for those individual countries. In the case of the US dollar it was found that there are some macrovariables which determine the exchange rate of the dollar against its major trading partners. Therefore we cannot say that exchange rate of every country in determined by Purchasing Power Parity or Interest Rate Parity alone. This paper finds that there are some macrovariables that determine the exchange rate of the dollar against some major currencies.