Analysis of movements in the AUD/USD exchange rate: comparison of four major models

Abstract

Four different models are considered in examining the movements in the AUD/USD exchange rate. Based on the value of R ², the uncovered interest parity model performs best, followed by the purchasing power parity model, the monetary model, and the Mundell–Fleming model. The opposite signs of the relative interest rate in the uncovered interest parity model and the monetary model and the insignificant coefficient of the domestic interest rate in the Mundell–Fleming model suggest that more study is needed to examine the behaviour of exchange rate fluctuations for the Australian dollar.