文档介绍：Chapter 15
Price Levels and the Exchange Rate in the Long Run
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Introduction
The Law of One Price
Purchasing Power Parity
A Long-Run Exchange Rate Model Based on PPP
Empirical Evidence on PPP and the Law of One Price
Explaining the Problems with PPP
anization
2
Beyond Purchasing Power Parity: A General Model of Long-Run Exchange Rates
International Interest Rate Differences and the Real Exchange Rate
Real Interest Parity
Summary
Appendix: The Fisher Effect, the Interest Rate, and the Exchange Rate Under the Flexible-Price ary Approach
anization
3
Introduction
The model of long-run exchange rate behavior provides the framework that actors in asset markets use to forecast future exchange rates.
Predictions about long-run movements in exchange rates are important even in the short run.
In the long run, national price levels play a key role in determining both interest rates and the relative prices at which countries’ products are traded.
The theory of purchasing power parity (PPP) explains movements in the exchange rate between two countries’ currencies by changes in the countries’ price levels.
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The Law of One Price
Law of one price
Identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency.
This law applies only petitive markets free of transport costs and official barriers to trade.
Example: If the dollar/pound exchange rate is $ per pound, a sweater that sells for $45 in New York must sell for £30 in London.
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It implies that the dollar price of good i is the same wherever it is sold:
PiUS = (E$/€) x (PiE)
where:
PiUS is the dollar price of good i when sold in the .
PiE is the corresponding euro price in Europe
E$/€ is the dollar/euro exchange rate
The Law of One Price
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Purchasing Power Parity
Theory of Purchasing Power Parity (PPP)
The exchange rate between two counties’ currencies equals the ratio of the counties’ price levels.
pares average prices across