Case study: Costaguana
The question if the peso has go enough can be answered by looking at consumer legal injurys in the United States and Costaguna and applying their differences to the purchasing power parity possibility (uvulopalatopharyngoplasty) so as to calculate pass judgment future bullion central pose.
Purchasing power parity theory (uvulopalatopharyngoplasty) states that exchange range between currencies will change to the differentials in hurt changes between countries. Therefore, exchange consider movements would be offset by the change in prices (Midura, 2009).
The consumer price movements in the US and Costaguana everywhere the years can be seen in the above table. position price differences into the PPP equation we can calculate the expected spot rate for peso for 2005:
St20 = (180/50)(140/70)
St20 = 1.8
St = 36
PPP rate for peso in 2005 is 36/$.
Because there is no data for consumer price levels for 2006, inflation rate differentials between two countries can be used to predict peso spot rate for 2006. PPP says that currencies with a high inflation rate should depreciate telling to currencies with a lower inflation rate (Shapiro, 2006). By work 2006 the inflation rate in Costaguana was two times high that the inflation rate in the US.
Assuming that inflation rates for the US and Costaguana are 5% and 10% respectively, 2006 spot rate for peso can be calculated as down the stairs:
StSo = 1+Pcp1+P$
St36 = 1+0.11+0.05
St = 37.71
Even though PPP does not hold true in its pure sense, sexual congress PPP has been widely used by banks and companies management to opine future exchange rates, especially in the long-run. Because the PPP rate and the official peso rate for 2006 are almost monovular it can be said that the peso has fallen enough.
The decision to float a currency is not only if an economic decision but a political virtuoso as well. However, looking at the Costaguanas economy, especially when considered against the performance of the US economy, against which...If you want to get a full essay, order it on our website: Orderessay
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