Different parity theories have developed over the years. This 10 page paper examines these theories and considers which, if any, can be seen as accurate in the past and ion the period 2000 – 20-04. The theories considered include absolute purchasing power parity, relative purchasing power parity, covered interested rate parity (CIRP) and uncovered interested rate parity (UCIRP). The bibliography cites 10 sources.
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factors such as the influence of international trade patterns, demand for currency, interest rates and inflation rates. However, although each of the parity theories may have logical reasoning when we
look at the actual application the number of influences and complexity of the markets mean that no single parity factor may be seen as a fully comprehensive and inclusive theory.
For example, if we consider the way in which the US dollar and UK sterling have performed relative to each other over the period 2000 - 2004 we see a
fluctuation of between $1.39 - nearly $2 to the ?1. However the economies were not indicates signs that would be expected under the parity theories. To consider this we can
look at various parity theories. When looking at empirical evidence the student should not that the majority of studies published this year still look at period before these years, so
we need to use recent research on former periods and apply these to the modern situation. Parity theories give interesting accounts
for the reasons behind the movements seen in prices, exchange rates and interest rates. In this paper we will look at several purchasing power parity theories; the absolute purchasing
power parity and the relative purchasing power parity, and how it may be impacted by the International Fisher Effect, and then at two forms of interest rate parity; covered interested
rate parity (CIRP) and uncovered interested rate parity (UCIRP). Looking first to purchasing power parity theories, this theory is one of the way that the exchange rates may behave
between two different countries according to the price levels in those countries (Anonymous, 2001). The basis of the theory is that goods or services should be the same in different