{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

# ch11 (4) - Two measures Speed of convergence how quickly...

This preview shows pages 1–2. Sign up to view the full content.

Two measures: Speed of convergence: how quickly deviations from PPP disappear over time (estimated to be 15% per year). Half-life: how long it takes for half of the deviations from PPP to disappear (estimated to be about four years). These estimates are useful for forecasting how long exchange rate adjustments will take. If a currency is undervalued or overvalued, then the real exchange rate is not equal to one at all times. We can allow for this by letting q change in the formulas we have derived. From the definition of q: If q=1 is constant (PPP) then the 1 st term on the right is zero. To forecast the change in E you just need to forecast the inflation differential, as before. If q deviates from 1, and we can measure it, then we can use the convergence speed to estimate how quickly q will rise/fall towards 1. This estimate of the rate of change of q can then be factored in, in addition to the inflation differential, to allow for an estimate of nominal depreciation.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern