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Absolute level measures of PPP contain significant measurement uncertainties and can be subject to large revisions. Therefore a comparison of absolute level measures between currency areas cannot be relied upon. Changes in PPP over time however are much more accurate. For this reason, an 'anchor', be it a specific point in time historically, or an average ...


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"Anchor" just means a slow moving, far from perfectly accurate but (hopefully still useful) estimate of value of a currency. The authors start with a PPP estimate (left side), then try to modify it in an ad-hoc manner by using expected inflation differentials (right side of the equation), which presumably adjust more quickly (and are forward looking). So ...



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