Purchasing Power Parity - its theoretical perspective and empirical evidence
Purchasing Power Parity - its theoretical perspective and empirical evidence

Author: Marc Munzer

Publisher: GRIN Verlag

Published: 2009-08-19

Total Pages: 16

ISBN-13: 364040470X

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Seminar paper from the year 2009 in the subject Business economics - Investment and Finance, grade: 1,3, University of Hull, language: English, abstract: The Swedish economist Gustav Cassel developed his theory of Purchasing Power Parity (henceforth PPP) more than 80 years. Ago, and today it is still an essential part of the framework for forecasting exchange rates, which includes parity conditions in international finance. International parity conditions imply purchasing power parity, the Fisher effect, the interest rate parity theory and the expectations theory. “They are the set of equilibrium relationships which should hold between product prices, interest rates, and spot and forward exchange rates assuming a freely floating exchange system.” (Demirag and Goddard, 1994, 70) Unfortunately, these theories do not always work out in reality, especially in times of financial crisis. However, they give us a central understanding of how and why multinational business is related in the world. Sometimes, “the mistake is not always in the theory itself, but in the way it is interpreted or applied in practice” (Eitemann et.al., 2004, 133). This essay will take a detailed look at PPP, its theoretical perspective, and the empirical evidence for it. [...]

The Principle, Practise and Problems of Purchasing Power Parity Theory
The Principle, Practise and Problems of Purchasing Power Parity Theory

Author: Alina Ignatiuk

Publisher: GRIN Verlag

Published: 2009-04-09

Total Pages: 33

ISBN-13: 3640307550

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Seminar paper from the year 2008 in the subject Business economics - Miscellaneous, grade: A, Schmalkalden University of Applied Sciences (Schmalkalden University), language: English, abstract: "Under the skin of any international economist lies a deep-seated belief in some variant of the PPP theory of the exchange rate." The purpose of this paper is to consider one of the most controversial theory in international economics – Purchasing Power Parity theory – its main idea, empirical evidence, limitations and practical application. The main idea of PPP is price levels changes determine the exchange rate change between two countries. There are two versions of PPP theory absolute and relative. Stricter absolute version of PPP did not find confirmation in reality and relative version of PPP theory was proposed. Despite theoretical and practical inconformity, PPP is present in many models of international economics as an explanation of exchange rate changes. The main apologist of PPP theory and its father was Gustav Cassel. He indicated that the exchange rate determined by price levels is not necessarily the actual exchange rate but the equilibrium one. Also Cassel mentioned that there is a tendency for the actual exchange rate to return to its equilibrium exchange rate. The original idea of PPP theory is described below: “Our willingness to pay a certain price for foreign money must ultimately and essentially be due to the fact that this money possesses a purchasing power as against commodities and services in that foreign country.” In this paper we considered the principle and two versions of PPP theory, discussed its empirical evidence and econometrical tests, and also tried to find possible reasons why PPP theory fails in reality and answered the question is this theory still useful for explaining exchange rates movements.

International Parity Conditions
International Parity Conditions

Author: Razzaque H. Bhatti

Publisher: Springer

Published: 2016-07-27

Total Pages: 389

ISBN-13: 1349255238

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This book presents an extensive survey of the theory and empirics of international parity conditions which are critical to our understanding of the linkages between world markets and the movement of interest and exchange rates across countries. The book falls into three parts dealing with the theory, methods of econometric testing and existing empirical evidence. Although it is intended to provide a consensus view on the subject, the authors also make some controversial propositions, particularly on the purchasing power parity conditions.

The Purchasing Power Parity Debate
The Purchasing Power Parity Debate

Author: Alan M. Taylor

Publisher:

Published: 2004

Total Pages: 52

ISBN-13:

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"Originally propounded by the sixteenth-century scholars of the University of Salamanca, the concept of purchasing power parity (PPP) was revived in the interwar period in the context of the debate concerning the appropriate level at which to re-establish international exchange rate parities. Broadly accepted as a long-run equilibrium condition in the post-war period, it was first advocated as a short-run equilibrium by many international economists in the first few years following the breakdown of the Bretton Woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s. Accordingly, over the last three decades, a large literature has built up that examines how much the data deviated from theory, and the fruits of this research have provided a deeper understanding of how well PPP applies in both the short run and the long run. Since the mid 1990s, larger datasets and nonlinear econometric methods, in particular, have improved estimation. As deviations narrowed between real exchange rates and PPP, so did the gap narrow between theory and data, and some degree of confidence in long-run PPP began to emerge again. In this respect, the idea of long-run PPP now enjoys perhaps its strongest support in more than thirty years, a distinct reversion in economic thought"--NBER website

The Monetary Approach to the Balance of Payments
The Monetary Approach to the Balance of Payments

Author: Jacob Frenkel

Publisher: Routledge

Published: 2013-07-18

Total Pages: 389

ISBN-13: 1135043493

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This book collects together the basic documents of an approach to the theory and policy of the balance of payments developed in the 1970s. The approach marked a return to the historical traditions of international monetary theory after some thirty years of departure from them – a departure occasioned by the international collapse of the 1930s, the Keynesian Revolution and a long period of war and post-war reconstruction in which the international monetary system was fragmented by exchange controls, currency inconvertibility and controls over international trade and capital movements.

Exchange Rate Economics
Exchange Rate Economics

Author: Ronald MacDonald

Publisher: Routledge

Published: 2005

Total Pages: 334

ISBN-13: 1134838220

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''In summary, the book is valuable as a textbook both at the advanced undergraduate level and at the graduate level. It is also very useful for the economist who wants to be brought up-to-date on theoretical and empirical research on exchange rate behaviour.'' ""Journal of International Economics""

Handbook of Exchange Rates
Handbook of Exchange Rates

Author: Jessica James

Publisher: John Wiley & Sons

Published: 2012-05-29

Total Pages: 674

ISBN-13: 1118445775

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Praise for Handbook of Exchange Rates “This book is remarkable. I expect it to become the anchor reference for people working in the foreign exchange field.” —Richard K. Lyons, Dean and Professor of Finance, Haas School of Business, University of California Berkeley “It is quite easily the most wide ranging treaty of expertise on the forex market I have ever come across. I will be keeping a copy close to my fingertips.” —Jim O’Neill, Chairman, Goldman Sachs Asset Management How should we evaluate the forecasting power of models? What are appropriate loss functions for major market participants? Is the exchange rate the only means of adjustment? Handbook of Exchange Rates answers these questions and many more, equipping readers with the relevant concepts and policies for working in today’s international economic climate. Featuring contributions written by leading specialists from the global financial arena, this handbook provides a collection of original ideas on foreign exchange (FX) rates in four succinct sections: • Overview introduces the history of the FX market and exchange rate regimes, discussing key instruments in the trading environment as well as macro and micro approaches to FX determination. • Exchange Rate Models and Methods focuses on forecasting exchange rates, featuring methodological contributions on the statistical methods for evaluating forecast performance, parity relationships, fair value models, and flow–based models. • FX Markets and Products outlines active currency management, currency hedging, hedge accounting; high frequency and algorithmic trading in FX; and FX strategy-based products. • FX Markets and Policy explores the current policies in place in global markets and presents a framework for analyzing financial crises. Throughout the book, topics are explored in-depth alongside their founding principles. Each chapter uses real-world examples from the financial industry and concludes with a summary that outlines key points and concepts. Handbook of Exchange Rates is an essential reference for fund managers and investors as well as practitioners and researchers working in finance, banking, business, and econometrics. The book also serves as a valuable supplement for courses on economics, business, and international finance at the upper-undergraduate and graduate levels.

Currencies, Commodities and Consumption
Currencies, Commodities and Consumption

Author: Kenneth W. Clements

Publisher: Cambridge University Press

Published: 2013-01-31

Total Pages: 401

ISBN-13: 110701476X

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Discusses economic issues associated with exchange rates, commodity prices, the economic size of countries and alternatives to PPP exchange rates.

Targeting the Real Exchange Rate
Targeting the Real Exchange Rate

Author: Mr.Guillermo Calvo

Publisher: International Monetary Fund

Published: 1994-02-01

Total Pages: 50

ISBN-13: 1451921217

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This paper presents a theoretical and empirical analysis of policies aimed at setting a more depreciated level of the real exchange rate. An intertemporal optimizing model suggests that, in the absence of changes in fiscal policy, a more depreciated level of the real exchange can only be attained temporarily. This can be achieved by means of higher inflation and/or higher real interest rates, depending on the degree of capital mobility. Evidence for Brazil, Chile, and Colombia supports the model’s prediction that undervalued real exchange rates are associated with higher inflation.