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Use of PPP in exchange rate forecasting for pegged currency

bowsie casey · 2009-07-29 10:56:53

I'm doing an assignment on Foreign Exchange, one part of which is to discuss the use of Purchasing Power Parity in exchange rate forecasting. More specifically, we should comment on the problems with using PPP when looking at a pegged currency system. If a weaker currency is pegged to the dollar, it will not devalue as…

29-07-2009 11:56am

#1

bowsie casey

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I'm doing an assignment on Foreign Exchange, one part of which is to discuss the use of Purchasing Power Parity in exchange rate forecasting. More specifically, we should comment on the problems with using PPP when looking at a pegged currency system.

If a weaker currency is pegged to the dollar, it will not devalue as would be expected given the inflation differentials.

Any thoughts ?

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#2 29-07-2009 12:49pm

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Sarno and Taylor, 'The Economics of Exchange Rates' is a great resource for this kind of work. Very readable and covers PPP in great detail.

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