DM/FF Exchange Rate Assessed

This research compares the actual currency exchange rates for the French Franc and the German Deutschmark for the period 1975-1994 with the currency exchange rates projected by the Purchasing Power Parity (PPP) Model. Currency exchange rates were structured as French Francs per German Deutschmark. Data were calculated quarterly.

The PPP Model is based on a contention that relative rates of inflation determine long-range exchange rate changes (Hooper & Morton, 1982, pp. 39-42). In this model, it is assumed that exchange rates adjust in a way which insures that, subsequent to conversion into another currency, a currency in question will purchase goods and services in a foreign country equivalent to that which it could purchase in the domestic economy (Burtle, 1995, p. 130).

This model also assumes that exchange rates will fluctuate with respect to relative rates of price inflation between countries (Humpage & Karamouzis, 1986, p. 2). It further assumes that shifts in trading patterns will cause changes in the relative rates of inflation between countries, which will, in turn, maintain a long-term equilibrium in currency values.

The PPP Model has a strong theoretical appeal. The major problem with it is that is simply has been unable to adequately explain currency exchange rate changes over the long-term, and in a wide vari

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attern of the actual exchange rateùa devaluation of the French Franc. Across the entire period of interest, the exchange rate as projected by the PPP Model was slightly higher than the actual exchange rate except for the Second Quarter, 1994, when the actual exchange rate was FF0.2945:DM1 and the PPP projected rate was FF0.2940:DM1. In 1975, the PPP projected exchange rate ranged from FF0.5861:DM1 to FF0.5952:DM1 compared to the actual range of FF0.5563:DM1 to FF.05868:DM1. Comparison of PPP projected and actual currency exchange rates for later years within the period of interest were as follows: (1979) PPP FF0.4335:DM1 to FF0.4391:DM1, actual FF0.4249:DM1 to FF0.4349:DM1; (1985) PPP FF0.3265:DM1 to FF0.3329:DM1, actual FF0.3255:DM1 to FF0.3281:DM1; (1994) FF0.2900:DM1 to FF0.2940:DM1, actual FF0.2897:DM1 to FF0.2945:DM1. Both actual and PPP projected currency exchange rates for the French Franc and German Deutschmark for the 197501994 period are illustrated graphically in chart form. This chart may be found on the following page. Discussion The four types of market conditions that are expected to affect exchange rates most are (1) changes in the value of exports and imports, (2) differential rates of inflation, (3) Char
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Approximate Pages = 5 (250 words per page)