Exchange Rate Uncertainty and the Law of One Price
REVIEW OF INTERNATIONAL ECONOMICS
Posted: 12 Jun 1997
This paper develops a framework for analyzing the impact of exchange rate uncertainty on the Law of One Price. Using the prices of very disaggregated, homogeneous products in a very open economy, Chile, where no institutions exist for hedging exchange risk, it then tests the model in a Bi-variate GARCH in mean context. Little evidence is found that short run exchange rate uncertainty constitutes a barrier to goods arbitrage.
JEL Classification: F10, F30, F14
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