CH03- Exchange Rates I - Monetary Approach in the LR-part1 - 2 slides- S13

Levels or rates of change stop and ask some questions

Info icon This preview shows pages 7–13. Sign up to view the full content.

View Full Document Right Arrow Icon
(levels or rates of change) Stop and ask some questions: Do the data support PPP? 13 Where do price levels come from? Empirical Evidence on PPP 14
Image of page 7

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

View Full Document Right Arrow Icon
5/23/2013 8 E MPIRICAL E VIDENCE ON PPP 15 How Fast is Convergence to PPP? Two useful measures: Speed of convergence : how quickly deviations from PPP disappear over time (about 15%/year). Half-life: Time for half of deviations from PPP to disappear 16 (about four years).
Image of page 8
5/23/2013 9 Explaining Deviations from PPP? Examine Assumptions Transaction costs Non-traded goods Imperfect competition and legal obstacles Price stickiness 17 The Big Mac Index The Economist uses Big Macs to evaluate whether currencies are undervalued or overvalued. Now use Starbucks tall latte , Apples iPod, & iTunes 18
Image of page 9

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

View Full Document Right Arrow Icon
5/23/2013 10 PPP as an Exchange Rate Theory In levels we have Absolute PPP : In rates of change we have Relative PPP : 19 PPP AS AN E XCHANGE R ATE T HEORY Now we need to ask: where do price levels / inflation rates come from? 20 To answer this question, we look @ monetary theory .
Image of page 10
5/23/2013 11 Overview of Money Market Recall that by definition, “money” is anything that is a : store of value unit of account medium of exchange For our purposes money is 21 the stock of liquid assets used to finance transactions: M1 – currency in circulation + demand deposits T HE M ONETARY A PPROACH : A S IMPLE M ODEL OF P RICES 22
Image of page 11

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

View Full Document Right Arrow Icon
5/23/2013 12 The Monetary Approach: A Simple Model of the Exchange Rate Recall that PPP shows relationship between price level and exchange rates.
Image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    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.

    Student Picture

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

  • Left Quote Icon

    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.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    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.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern