scholarly journals A Survey on Exchange Rates Determination in the Teachings of the Austrian School

2021 ◽  
pp. 105-144
Author(s):  
Massimiliano Neri
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Interest Rates ◽  
Purchasing Power Parity ◽  
Balance Of Payments ◽  
Purchasing Power ◽  
Power Parity ◽  
Austrian Theory ◽  
Palabras Clave ◽  
International Capital Movements

This survey represents a recollection of the contributions of prominent Austrian economists on the subject of the exchange rate determination (Mises, Hayek and Haberler). We review the theoretical fundaments that allow for a comprehensive understanding of the microeconomic forces that determine exchange rates. Then we examine the Purchasing Power Parity Theory, both from a neoclassical and Austrian viewpoint. Finally we inspect the international movements of money and the associations of these with the dynamics of the balance of payments and exchange rate. We leave open the door for future investigations over the idea of incorporating the notion of the Interest rates Parity, intended as a «tendency law», in the Austrian theory. Key words: Exchange rate, Austrian theory, purchasing power parity, balance of payments, international capital movements. Clasificación JEL: F31. Resumen: El presente ensayo representa una recopilación de las con-tribuciones de prominentes economistas austriacos sobre la de-terminación del tipo de cambio (Mises, Hayek, Haberler). En la pri-mera parte se repasan los fundamentos teoréticos que permiten una comprensión exhaustiva de las fuerzas microeconómicas que deter-minan el tipo de cambio. A continuación se examina la teoría de la paridad de poder adquisitivo, tanto desde un punto de vista austriaco como neoclásico. Finalmente se inspeccionan los movimientos inter-nacionales de dinero y las asociaciones de los mismos con las diná-micas de la balanza de pagos y del tipo de cambio. Se deja abierta la puerta para futuras investigaciones sobre la idea de incorporar la noción de la paridad de tipo de interés, entendida como «ley de ten-dencia», dentro de la teoría austriaca. Palabras clave: Tipo de cambio, análisis austriaco, paridad del poder adquisitivo, balanza de pagos, movimientos internacionales de capital.

Purchasing Power Parity and Real Exchange Rates

2019 ◽  
Author(s):  
Menzie D. Chinn
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Purchasing Power Parity ◽  
Time Horizon ◽  
Nominal Exchange Rate ◽  
Purchasing Power ◽  
Power Parity ◽  
The Real ◽  
Short Run

The idea that prices and exchange rates adjust so as to equalize the common-currency price of identical bundles of goods—purchasing power parity (PPP)—is a topic of central importance in international finance. If PPP holds continuously, then nominal exchange rate changes do not influence trade flows. If PPP does not hold in the short run, but does in the long run, then monetary factors can affect the real exchange rate only temporarily. Substantial evidence has accumulated—with the advent of new statistical tests, alternative data sets, and longer spans of data—that purchasing power parity does not typically hold in the short run. One reason why PPP doesn’t hold in the short run might be due to sticky prices, in combination with other factors, such as trade barriers. The evidence is mixed for the longer run. Variations in the real exchange rate in the longer run can also be driven by shocks to demand, arising from changes in government spending, the terms of trade, as well as wealth and debt stocks. At time horizon of decades, trend movements in the real exchange rate—that is, systematically trending deviations in PPP—could be due to the presence of nontraded goods, combined with real factors such as differentials in productivity growth. The well-known positive association between the price level and income levels—also known as the “Penn Effect”—is consistent with this channel. Whether PPP holds then depends on the time period, the time horizon, and the currencies examined.

scholarly journals International Evidence On Purchasing Power Parity Theory: A Partial Equilibrium Empirical Investigation

2011 ◽  
Vol 7 (5) ◽  
Author(s):  
Bahram Adrangi ◽  
Mary Allender ◽  
Kambiz Raffiee
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Purchasing Power Parity ◽  
Fourth Quarter ◽  
Partial Equilibrium ◽  
Purchasing Power ◽  
Power Parity ◽  
Australian Dollar ◽  
Bilateral Exchange ◽  
Us Dollar

This paper tests the Purchasing Power Parity (PPP) theory in a partial equilibrium framework. Statistical tests are employed to test the PPP theory for floating exchange rates of the Australian and Canadian dollars, Swiss frank and the British pound. The study period spans the fourth quarter of 1974 through the fourth quarter of 2006. The Johansen and Juselieus test of cointegration supports a long-run relationship between inflation and exchange rate predicted by the PPP theory only for the bilateral exchange rates of the pound and the Australian dollar. This evidence suggests that the PPP in its strict theoretical sense in the case of the bilateral exchange rate of the US dollar and Australian dollar is rejected but not for the case of the exchange rate of the pound and US dollar. However, the Granger causality test further supports the findings of the cointegration test. It shows that in the short-run, the money supply and GDP ratios Granger cause the movements of this exchange rate.

scholarly journals A Correct Test of Purchasing Power Parity: The Case of Pak-Rupee Exchange Rates

1996 ◽  
Vol 35 (4II) ◽  
pp. 671-682 ◽  
Author(s):  
Razzaque H. Bhatti
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Empirical Evidence ◽  
Purchasing Power Parity ◽  
Trade Balance ◽  
Purchasing Power ◽  
Power Parity ◽  
Long Run ◽  
Bayesian Test ◽  
Almost All

This paper presents some empirical evidence on long-run purchasing power parity (PPP) for eight Pak-rupee exchange rates over the period 1982:1–1994:4. Results obtained from testing for cointegration and coefficient restrictions using the Johansen (1988, 1991) procedure are supportive of PPP in almost all cases. These results are also supported by those obtained from testing for mean reversion in the real exchange rate using the Sims (1988) Bayesian test. One of the conclusions that emerge from these results is that devaluation of Pak-rupee vis-à-vis major industrial currencies under investigation may be unlikely to improve the country’s external competitiveness and, consequently, the deficit in its trade balance.

scholarly journals Purchasing Power Parity Approach to Exchange Rate Misalignment in Nigeria

2021 ◽  
Vol 12 (No. 1) ◽  
pp. 45-75
Author(s):  
Musa Nakorji ◽  
Ngozi T. I. Agboegbulem ◽  
Blessing A. Gaiya ◽  
Ngozi V. Atoi
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Purchasing Power Parity ◽  
Structural Breaks ◽  
Empirical Support ◽  
Purchasing Power ◽  
Power Parity ◽  
Exchange Rate Misalignment ◽  
Us Dollar ◽  
Chinese Yuan

This study examines the purchasing power parity (PPP) approach to the determination of exchange rate misalignment in Nigeria by using two variants of the PPP: the absolute PPP (aPPP) and the relative PPP (rPPP). Data on the Nigerian Naira to US Dollar ( N/$), British Pound ( N/£) and Chinese Yuan (N /¥) interbank exchange rates, Nigeria consumer price index and Inflation as well as the US, UK and China consumer price indices and inflation rates spanning 2008:M1 to 2018:M12 were utilized. A recently modified fractional cointegration framework was employed, taking care of smooth structural breaks and nonlinearity, while the unit root tests employed the fractional alternatives. The results confirmed that the aPPP approach to exchange rate determination is unrealistic but revealed empirical support for the rPPP approach. Furthermore, the exchange rates computed with the rPPP approach show that the interbank Naira to US Dollar, UK Pounds and Chinese Yuan exchange rates were overvalued in most of the period of this study. The period of undervaluation observed in June 2016 and April 2017 coincided with the periods when CBN introduced the investors and exporters window. The study recommends the use of rPPP for gauging the level of exchange rate misalignment in Nigeria and suggests the need to diversify the export base to appreciate the exchange rate.

Monetary and Exchange Rate Policies for International Financial Stability: A Proposal

1988 ◽  
Vol 2 (1) ◽  
pp. 83-103 ◽  
Author(s):  
Ronald I McKinnon
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Foreign Exchange ◽  
Purchasing Power Parity ◽  
Financial Stability ◽  
Foreign Exchange Market ◽  
The United States ◽  
Power Parity ◽  
Monetary Reform ◽  
Exchange Rate Fluctuations

What keeps the three major industrial blocs -- Western Europe, North America, and industrialized Asia -- from developing a common monetary standard to prevent exchange-rate fluctuations? One important reason is the differing theoretical perspectives of economic advisers. The first issue is whether or not a floating foreign exchange market -- where governments do not systematically target exchange rates -- is “efficient.” Many economists believe that exchange risk can be effectively hedged in forward markets so international monetary reform is unnecessary. Second, after a decade and a half of unremitting turbulence in the foreign exchange markets, economists cannot agree on “equilibrium” or desirable official targets for exchange rates if they were to be stabilized. The contending principles of purchasing power parity and of balanced trade yield very different estimates for the “correct” yen/dollar and mark/dollar exchange rates. Third, if the three major blocs can agree to fix nominal exchange rates within narrow bands, by what working rule should the new monetary standard be anchored to prevent worldwide inflation or deflation? After considering the magnitude of exchange-rate fluctuations since floating began in the early 1970s, I analyze these conceptual issues in the course of demonstrating how the central banks of Japan, the United States, and Germany (representing the continental European bloc) can establish fixed exchange rates and international monetary stability.

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