Essay Title: 

international finance

April 3, 2016 | Author: | Posted in finance, mathematics and economics

TABLE OF CONTENTS

1 .0 Introduction 2

2 .0 PPP Theory – Discussion on Holding the Theory 3

3 .0 Purpose of the Project 4

4 .0 Test Design 6

5 .0 Testing the PPP Theory-Using Regression Analysis 7

Regression Analysis I 9

Regression Analysis II 11

Regression Analysis III 14

Regression Analysis IV 16

6 .0 Evaluation of Analysis 18

7 .0 Conclusion 19

Reference List 21

Pro Forma 22

Definitions 23 [banner_entry_middle]

p Data on Difference in Interest Rates UK-US 25

Data on Difference in Interest Rates UK-JAPAN 28

THE VALIDITY OF PURCHASING POWER PARITY THEORY WITH RESPECT TO INTERNATIONAL CURRENCY EXCHANGE FLECTUATIONS

1 .0 INTRODUCTION

The history of Purchasing Power Parity (PPP ) theory dates back to the Sixteenth Century scholars of the University of Salamanca . While the world saw its revival in the interwar period , it was broadly accepted in the post war periods , as a long term equilibrium condition . Some economists advocated the short term usage of this theory . Several researches and studies have been conducted in the last three decades and with the help of the findings from these studies , there emerged a situation which will enable the users to have a deeper understanding of how well PPP applies in both the short run and the long run . Since the mid of 1990s the studies have been basing themselves on larger datasets and non-linear economic methods and thus have improved the estimation procedures

As deviations narrowed between real exchange rates and PPP , so did the gap narrow between theory and data , and some degree of confidence in long-run PPP began to emerge again . In this respect , the idea of long-run PPP now enjoys perhaps its strongest support in more than thirty years , a distinct reversion in economic thought (Alan M Taylor and Mark

. Taylor 2004

Thus PPP theory has a long history in economics but , the specific terminology was introduced in the years after World War I during the time there were international policy debate concerning the appropriate level for nominal exchange rates among the major industrialized countries after the large scale inflation during and after the War The question of how exchange rates adjust is central to exchange rate policy , since countries with fixed exchange rates need to know what the equilibrium exchange rate is likely to be and countries with variable exchange rates would like to know what level and variation in real and nominal exchange rates they should expect . In broader terms , the question of whether exchange rates adjust toward a level established by purchasing power parity helps to determine the extent to which the international macroeconomic system is self-equilibrating (Alan M Taylor and Mark

. Taylor 2004 . This is the central theme of this . With a statistical analysis of the exchange price fluctuations different currencies with respect to a single currency and the inflation rates during the same period , over a period of 10 years , this tries to establish a possible correlation between the exchange rates and the inflation rates

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