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A Classroom Experiment on Exchange Rate Determination with Purchasing Power Parity

David Mitchell, Robert Rebelein (), Patricia Schneider (), Nicole Simpson () and Eric Fisher ()
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Patricia Schneider: Mount Holyoke College Department of Economics

No 87, Vassar College Department of Economics Working Paper Series from Vassar College Department of Economics

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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Journal Article: A Classroom Experiment on Exchange Rate Determination with Purchasing Power Parity (2009) Downloads
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