Theory and Refinement of the Enhanced-PPP Model for Equilibrium Exchange Rates ---- With Estimates for Valuations of Dollar, Yuan and Others

27 Pages Posted: 6 Feb 2012 Last revised: 21 Mar 2012

Date Written: January 2012

Abstract

This study establishes a rigorous theory for the recent popular enhanced-Purchasing-Power-Parity model for estimating the long run equilibrium exchange rates of currencies. The necessary and sufficient conditions for the validity of the model are derived and proved. Based on the theory, this research takes into account the economic sizes of the countries along with the Balassa-Samuelson effect, and refines the Frankel-Rogoff specification. The refined model is applied to the data to estimate the under- or over-valuation of different currencies in the world. An empirical test to assess these estimation results further supports the validity of the model.

Keywords: currency value, equilibrium exchange rate, PPP, dollar, euro, yuan

JEL Classification: F31, F40, C51

Suggested Citation

Chang, Gene Hsin, Theory and Refinement of the Enhanced-PPP Model for Equilibrium Exchange Rates ---- With Estimates for Valuations of Dollar, Yuan and Others (January 2012). Available at SSRN: https://ssrn.com/abstract=1998477 or http://dx.doi.org/10.2139/ssrn.1998477

Gene Hsin Chang (Contact Author)

University of Toledo ( email )

Department of Economics
Toledo, OH 43606
United States
419-530-4677 (Phone)
419-530-7844 (Fax)

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