Sie sind auf Seite 1von 2

CHAPTER 8: RELATIONSHIPS AMONG INFLATION, INTEREST RATES, AND EXCHANGE

RATES

o Purchasing Power Parity


- Recall: when a countrys inflation rate , the demand for its currency as its exports
(because of higher prices), also, consumer and firms in that country tend to increase their
importing, both of these places downward pressure on the high-inflation countrys currency.
- Attempts to quantify the relationship between inflation and exchange rate
- More specific about the degree by which a currency will weaken in response to high
inflation

TWO FORMS OF PPP:


Absolute Form of PPP
- in absence of international barriers, consumers will shift their demand to wherever prices
are lowest
- prices of the same basket of goods in two different countries should be equal when
measured in a common currency, if there are discrepancies, then demand should shift so
that these prices converge.
- The existence of transportation costs, tariffs, and quotas render the absolute form of PPP
unrealistic. In this case, the discrepancy in price will continue.

Relative Form of PPP


- accounts such market imperfections such as transportation costs, tariffs and quotas.
- Acknowledges that these imperfections make it unlikely for prices of the same basket of
goods in different countries to be the same when measured in a common currency.
- However, this form suggests that the rate of change in the prices of those baskets should
be comparable when measured in a common currency, all other things unchanged.

RATIONALE BEHIND RELATIVE PPP THEORY


- exchange rate adjustment is necessary for the relative purchasing power to be the same
whether buying products locally or from another country
- if not equal, then consumer will shift purchases to wherever products are cheaper until
purchasing power equalizes.

DERIVATION OF PURCHASING POWER PARITY


- if > , and if exchange rate does not change between two countries, then consumers
purchasing power is greater for foreign than for home goods, PPP does not hold
- if < , and if exchange rate does not change between two countries, then consumers
purchasing power is greater for home than for foreign good, PPP also does not hold
- PPP theory suggests that the exchange rate will not remain constant but will adjust to
maintain the parity in purchasing power

+
=
+
- this expresses the relationsip between relative inflation and exchange rates
- observe that if > , then should be positive, which implies that the foreign currency will
appreciate
- this theory is more applicable when two countries engage in extensive international trade
with each other; if there is not much trade, then inflation differential will have little effect and
so exchange rate should not be expected to change
SIMPLIFIED PPP RELATIONSHIP
=
- less precise
- percentage change in exchange rate should be approximately equal to the difference in
inflation rates between two countries
- appropriately only when inflation differential is small or when the value of is close to zero

SUMMARY of PPP
S1: Local currency should
Relatively HIGH Local Inflation Imports will , exports will depreciate by same degree as
inflation differential
S2: Local currency should
Relatively LOW Local Inflation Imports will , exports will appreciate by same degree as
inflation differential
S3: Local currencys value is not
Local and Foreign Inflation rate No impact of inflation on Import affected by inflation
are SIMILAR or Export volume

Das könnte Ihnen auch gefallen