International Parity Conditions

3174 Words13 Pages
“Prices, Interest Rates, and Exchange Rates in Equilibrium” (International Parity Conditions)

Table of Content

Executive Summary………………………………………………………3
1. Introduction………………………………………………………….4
2. Literature Review……………………………………………………6
3. Findings and Analysis: ………………………………………………10
a. PPP………………………………………………..…………10
b. FE……………………………………………..……………..12
c. IFE…………………………………………..……………….14
4. Conclusion & Recommendations …………….……..………………16
Bibliography……………………………………………………………….17
Appendix A. Historical Data………………………………………………18

Table of Figures

Figure 1. International Parity Conditions
Figure 2. Scatter Diagram for PPP
Figure 3. Time-series data for inflation rates differential and exchange rate change
Figure 4. Regression Plot for PPP
Figure 5. Scatter Diagram for FE
Figure 6. Time-series data for inflation and interest rates differentials
Figure 7. Regression Plot for FE
Figure 8. Scatter Diagram for IFE
Figure 9. Time-series data for interest rates differentials and exchange rate change
Figure 10. Regression Plot for IFE
Executive Summary

This assignment is aimed at examining the evidence for three of the relationships that underpin (explicitly or implicitly) much of international macroeconomics. The first is purchasing power parity (PPP), or the hypothesis that there exists a constant long-run equilibrium real exchange rate. The second is Fisher Effect, which tests the relationship between difference in inflation rates and difference in nominal interest rates. The third establishes a relationship between real exchange rates and real interest rate differentials or International Fisher Effect. The tests are conducted on a basis of two economies: United States and Kazakhstan. The results are obtained using graphs and regression models, which significantly increase the power of the tests. The empirical evidence is evaluated on the basis of historical data for the period of 1999-2003.
The paper is divided into two main parts. The first part contains analysis of the historical data about interest rates, exchange rates, and 3-month T-bills (Kazakhstani name: MEKKAM) in two countries: Kazakhstan and USA. The second part gives implications based on the res...

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...ptember 148 6.3 6 2.32 0.93 0.1218 -3.98 -5.07
October 147.82 6.3 2.04 0.94 0.5647 -4.26
November 146.99 6.4 1.77 0.91 1.5826 -4.63
December 144.7 6.4 1.88 0.93 -4.52

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