Purchasing Power Parity (PPP) .
- Price equalization across countries A long-standing idea
- Consider the difference in inflation in terms of the determination of exchange rates
- Interest Rate (IRP) .
- It links interest rates, inflation expectations and exchange rates
- It provides a relationship between interest rate differentials and exchange rate fluctuations
- bill of exchange (BOP) model
- Analyzes current account balances, capital flows, and investments
- Emphasize the effects of trade balance and capital flows on money prices
- Property Market Model
- He considers the effect of financial assets on exchange rates
- It links the desired investment of assets to the demand for money
- Elastic approach
- It focuses on demand for and response to funding
- Consider factors such as inflation, capital flows and interest rates
- The economic model
It links money supply, interest rates and exchange rates
It shows that changes in the money supply affect the domestic interest rate and affect the exchange rate
Example of Dornbusch excess
It explains short-term fluctuations in exchange rates
suggest that the rate exceeds the equilibrium level in response to an unexpected shock
agent-based models
It illustrates how different market participants interact
Examines collective effects on exchange rates based on individual actions and mechanisms
Demystying exchange rate policy models
Purchasing Power Parity (PPP): Price equilibrium across borders
Purchasing power parity (PPP) takes a comprehensive view, aimed at equalizing prices of goods and services across countries. Inflation differences in determining the exchange rate of the two currencies.
Interest Rate Parity (IRP): The relationship between rates and exchange will be displayed
Interest rate parity (IRP) combines interest rates, inflation expectations, and exchange rates. Examining the relationship between interest rate differentials and exchange rate fluctuations sheds light on important economic dynamics.
Balance of payments (BOP) model: trade balance and exchange rate
The BOP model forecasts changes in the exchange rate that will strengthen a country’s current account, capital inflows, and reserves. It focuses on the impact of trade balance and capital flows on the value of a country’s currency.