Abstract

In foreign exchange transaction, arbitrage mechanism is the means by which a market functions with the global market order. An arbitrage confirms that bilateral exchange rate is the same as trilateral rates. However, the long-run behavior of the exchange rate could be diverged from the short-run movement. This study, in this sense, reviews the advances of exchange rates in the long-run and the short-run respectively in order to develop desirable attainments on their optimality conditions. These effects on the economy will be discussed. In concluding words, it is revealed that the short-run and the long-run exchange rates exhibit a significant discrepancy and have different behaviors. This implies that any spread between the short-run and the long-run exchange rates might happen due to partially different adjustment of the arbitrage rule.