Currency Exchange Rates

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 variety of environments (Hooper & Morton, 1982, pp. 52-54). The PPP Model, however, has been used successfully in mo

. . .
e 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) Chart French Franc/Deutschmark Exchange Rates 1975-1994: Actual and PPP __________
. . .

Some common words found in the essay are:
Bekaert Hodrick, PPP Model, French Franc, German Deutschmark, Hooper Morton, Humpage Karamouzis, France Germany, Actual PPP, currency exchange, Model Actual, exchange rate, Money Finance, exchange rates, ppp model, currency exchange rates, french franc, german deutschmark, currency exchange rate, value country's, ppp projected, actual currency exchange, country's currency, actual currency, value country's currency, franc german deutschmark,
Approximate Word count = 1311
Approximate Pages = 5 (250 words per page)

More Essays on Currency Exchange Rates