1 4.23
1989 1 7.28
1990 1 8.00
1991 1 10.50
(sources: Paxton, 1991, p. 944; United Nations, 1988, p. 207; United States Department of Commerce, 1992, p. 2)
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Although many models have been developed to explain and predict international exchange rate changes, three models have demonstrated staying power. These models are (1) the purchasing power parity (PPPM) model, (2) the current account balance (CABM) model, and (3) the portfolio balance (PFBM) model. Additionally, the random walk model (RWM), and the international Fischer effect model (IFEM) have gained some recent acceptance.
The purchasing power parity model (PPPM) is based on a contention that relative rates of inflation determine long range exchange rate changes (Hooper and Martin, 1982, pp. 39 42). The PPPM assumes that exchange rates adjust in a ways which insure 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 its domestic economy. This model also assumes that exchange rates will fluctuate with respect to relative rates of price inflation between countries (Humpage and Karamouzis, 1986, p. 2). The PPPM 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 PPPM has a strong theoretical appeal. The major problem with the model is that has been unable to explain adequately currency exchange rate changes over the long term, and in a wide variety of environments (Hooper and Martin, 19...