"Prices, Interest Rates, and Exchange Rates in Equilibrium" (International Parity Conditions)
Table of Content
Executive Summary?????????????????????3
1. Introduction??????????????????????.4
2. Literature Review????????????????????6
3. Findings and Analysis: ??????????????????10
a. PPP??????????????????..????10
b. FE?????????????????..?????..12
c. IFE????????????????..??????.14
4. Conclusion & Recommendations ?????.??..??????16
Bibliography????????????????????????.17
Appendix A. Historical Data??????????????????18
Table of Figures
Figure 1. International Parity Conditions
Figure 2. Scatter Diagram for PPP
Figure 3. Time-series data for inflation rates differential and exchange rate change
Figure 4. Regression Plot for PPP
Figure 5. Scatter Diagram for FE
Figure 6. Time-series data for inflation and interest rates differentials
Figure 7. Regression Plot for FE
Figure 8. Scatter Diagram for IFE
Figure 9. Time-series data for interest rates differentials and exchange rate change
Figure 10. Regression Plot for IFE
Executive Summary
This assignment is aimed at examining the evidence for three of the relationships that underpin (explicitly or implicitly) much of international macroeconomics. The first is purchasing power parity (PPP), or the hypothesis that there exists a constant long-run equilibrium real exchange rate. The second is Fisher Effect, which tests the relationship between difference in inflation rates and difference in nominal interest rates. The third establishes a relationship between real exchange rates and real interest rate differen ...