An Empirical Study on Exchange Rate Parity Condition –Evidence From BRICS Countries

Abstract

This paper highlights briefs about theories of the exchange rate
parity conditions and tests its empirical validity. It covered four
parity conditions PPP (Purchasing Power Parity), FE (Fisher Effects),
IFE (International Fisher Effects), and IRP (Interest rate Parity), Each
of these parity conditions based on the future spot rate of exchange
can be determined. Regression analysis applied to monthly nominal
interest differentials, inflation differential and exchange rate change
between the years 2011- 2017, along with lags. The investigated
country pairs are US- India, US-South Africa, US-Brazil, US-China
and US-Russia. The result shows that only international fisher effect
is partially worked and other parity theory do not hold exchange
rate. This means that the exchange rate movement reacts to other
factor.