A Classroom Experiment on Exchange Rate Determination with Purchasing Power Parity

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A Classroom Experiment on Exchange Rate Determination with Purchasing Power Parity

Author Info

Mitchell, David () (St. Mary's College of CA Department of Economics)
Rebelein, Robert P. () (Vassar College Department of Economics)
Schneider, Patricia () (Mount Holyoke College Department of Economics)
Simpson, Nicole B. () (Colgate College Department of Economics)
Eric Fisher () (California Polytechnic State University and Federal Reserve Bank of Cleveland)

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Abstract

We develop a classroom experiment on exchange rate determination appropriate for undergraduate courses in macroeconomics and international economics. Students represent citizens from different countries and need to obtain currency to purchase goods. By participating in a sealed bid auction to buy currency, students gain a better understanding of currency markets and the determination of exchange rates. The implicit framework for exchange rate determination is one in which prices are perfectly flexible (in the long run) so that purchasing power parity (PPP) prevails. Additional treatments allow students to examine the impact of transport costs, nontradable goods and tariffs on the exchange rate and to explore possible deviations from PPP.

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Paper provided by Vassar College Department of Economics in its series Vassar College Department of Economics Working Paper Series with number 87.

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Handle: RePEc:vas:papers:87

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This paper has been announced in the following NEP Reports:

NEP-ALL-2007-02-17 (All new papers)
NEP-EXP-2007-02-17 (Experimental Economics)
NEP-IFN-2007-02-17 (International Finance)

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Taylor, Alan M & Taylor, Mark P, 2004. "The Purchasing Power Parity Debate," CEPR Discussion Papers 4495, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Other versions:
- Taylor, Alan & Taylor, Mark, 2004. "The Purchasing Power Parity Debate," Working Papers 04-6, University of California at Davis, Department of Economics. [Downloadable!]
- Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," NBER Working Papers 10607, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 135-158, Fall. [Downloadable!] (restricted)
Lisa R. Anderson & Sarah L. Stafford, 2006. "Does Crime Pay? A Classroom Demonstration of Monitoring and Enforcement," Southern Economic Journal, Southern Economic Association, vol. 72(4), pages 1016â10, April.
Other versions:
- Lisa R. Anderson & Sarah L. Stafford, 2005. "Does Crime Pay? A Classroom Demonstration of Monitoring and Enforcement," Working Papers 17, Department of Economics, College of William and Mary. [Downloadable!]
Bradley T. Ewing & Jamie B. Kruse & Mark A. Thompson, 2004. "Money Demand and Risk: A Classroom Experiment," Journal of Economic Education, Helen Dwight Reid Foundation, vol. 35(3), pages 243-250. [Downloadable!]
Brauer, Jurgen & Delemeester, Greg, 2001. " Games Economists Play: A Survey of Non-computerized Classroom-Games for College Economics," Journal of Economic Surveys, Blackwell Publishing, vol. 15(2), pages 221-36, April. [Downloadable!] (restricted)
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Denise Hazlett & Cynthia D. Hill, 2003. "Calculating the Candy Price Index: A Classroom Inflation Experiment," Journal of Economic Education, Helen Dwight Reid Foundation, vol. 34(3), pages 214-223. [Downloadable!]
Denise Hazlett, 2003. "A Search-Theoretic Classroom Experiment with Money," International Review of Economic Education, Economics Network, University of Bristol, vol. 2(1), pages 80-90. [Downloadable!]
Charles A. Holt, 1999. "Teaching Economics with Classroom Experiments: A Symposium," Southern Economic Journal, Southern Economic Association, vol. 65(3), pages 603-610, January.

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