The fixed exchange rate system means that the monetary authorities basically fix the exchange rate of their own currency against other currencies, and the fluctuation range is limited to a small range. Under this system, the exchange rate fluctuates within a legal range under the control of the monetary authorities, so it is relatively stable.
Floating exchange rate system generally refers to free floating exchange rate system, which is relative to fixed exchange rate system. It means that a country does not stipulate the floating range of exchange rate between its own currency and foreign currencies, nor does it undertake the obligation to maintain the floating limit of exchange rate, but allows the exchange rate to float freely with the change of supply and demand in the foreign exchange market. Under this system, foreign exchange has completely become a special commodity in the international financial market, and the exchange rate has become the price for buying and selling this commodity.
Similarities and differences between absolute purchasing power parity and relative purchasing power parity
If absolute purchasing power parity is established, relative purchasing power parity must also be established, because the price index is the ratio of absolute prices at two time points. Conversely, if relative purchasing power parity is established, absolute purchasing power parity may not be established. For example, the exchange rate in the base period and the reporting period is equal to half of absolute purchasing power parity, and then the relative purchasing power parity is established, and the absolute purchasing power parity is not established.
1. absolute purchasing power parity theory
It is believed that the equilibrium exchange rate is determined by the purchasing power of the two currencies, that is, by the relative ratio of the general price levels of the two countries. Assuming that E represents the exchange rate, and Pd and Pf represent the domestic and foreign price levels respectively, the exchange rate is determined by the following formula: E=Pd/Pf.
That is, home country price level/foreign price level.
It's just a different code name
2. Relative purchasing power parity theory
Relative purchasing power parity holds that the exchange rate should be adjusted with the changes in the price levels of the two countries.
Relative purchasing power parity can be used to calculate whether a currency actually appreciates or depreciates. Only when the currency is at an equilibrium level in the base period can we determine whether the currency is undervalued in the suspension period. If the currency has greatly deviated from the equilibrium level in the base period, it is difficult to determine whether the currency is undervalued in the suspension period only based on the calculation of relative purchasing power.
Change the above formula to:
Exchange rate change rate = domestic price increase rate-foreign price increase rate
ST = s 0 *( 1+ inflation rate home page) t/(1+inflation rate foreign)^t
This should be the calculation formula before differentiation.
According to Mundell-Fleming model, how to adjust the balance of payments when the capital is completely stagnant, the exchange rate fluctuates and there is a surplus in the balance of payments?
to be continued