Exchange Rate Uncertainty and the Law of One Price |
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Authors: | William F Maloney |
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Institution: | University of Illinois, Urbana-Champaign, USA |
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Abstract: | 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 bivariate GARCH in mean context. Little evidence is found that short-run exchange rate uncertainty consititutes a barrier to goods arbitrage. |
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