lecture 4 exchange rate determination国际金融教材.ppt

Purchasing Power Parity Interest-rate Parity Asset Market Approach Summarization Assignments;Purchasing Power Parity;II.2 The Law of One Price (LOOP) The LOOP states that in a competitive market free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency (Krugman and Obstfeld, 2003, pp. 389). Let pi denote the home price of a certain tradable goods (i) in home country and pi*, the foreign price of the same goods in another country, then the law of one price can be expressed as follows, pi=Spi* Where, as before, S denotes the exchange rate.;III. APPP Suppose the LOOP holds for any tradable goods, and the weight of each tradable goods in the basket both in home country and foreign country are the same when computing their price indices. Thus the relation of the price indices between the two countries may take the following form. Where ?i stands for the weight of the ith tradable goods in the basket chosen by both countries.; Obviously, the left hand is the general price index of home country, and the right hand also contains the part of foreign price index, namely, Finally, we have, S=P/P* This is the absolute form of PPP (APPP). Conclusion: The absolute form of PPP shows that the exchange rate is determined by both home and foreign price indices.;V. Empirical Tests of PPP V.1 Measurement Problems The choice of price index Classifications of commodities The choice of a base year V.2 Graphical Evidence We simply test the theory by checking whether the real exchange rate is dependent of the nominal one or keeps stable over times. Figures 2-2-1 to 2-2-5 illustrate the simple test of PPP on a few countries’ exchange rates.;Figure 2-2-1 Graphical test of PPP on RMB exchange rate Source: BIS.;Figure 2-2-2 Graphical test of PPP on Australian Yen Source: BIS.;Figure 2-2-3 Graphical test