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I have been trying to calculate the PPP-adjusted EURUSD exchange rate. I am not sure if it is the same as relative PPP, for which I have used this formula:

Spot rate at time t = Current spot rate * ((1+inflation of country A)/(1+inflation of country B))^t

With this formula though, my values for PPP don't at all look like Hussman's.

Euro PPP exchange rate

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  • $\begingroup$ I don't know why there is a ^t at the end of this expression. It should just be the ratio of one plus the respective monthly inflations. You may have to divide by 12 if you are working with annualized monthly inflation figures. $\endgroup$
    – nbbo2
    Commented Jun 8, 2015 at 15:13
  • $\begingroup$ Also, just to be clear, Current Spot Rate should be replaced by Spot Rate at time t-1. I assume that is what you meant. $\endgroup$
    – nbbo2
    Commented Jun 8, 2015 at 15:57
  • $\begingroup$ The formula is from my CFA text book so I am not sure you are right. Why should it be the spot rate at t-1? $\endgroup$
    – user15772
    Commented Jun 8, 2015 at 16:14

2 Answers 2

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What you are looking at is relative PPP, which claims that exchange rate movements are explained by relative inflation movements, see wiki. However from the picture I would guess he is looking at a bottom up purchasing power parity aggregate, which as @user1483 eluded to, is a different calculation. There are several providers of this type of index, the OECD provides one. A brief description of their methodology is explained here and a more detailed description can be found here. Ultimately the two are related and under a set of set of economic assumptions on the world (which don't hold empirically) are equivalent however practically speaking the calculation methodologies are quite different and will yield different results.

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Eurostat has a manual on the calculation and use of PPP. This is available here.

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    $\begingroup$ Which page? which formula? can you write it into the answer? $\endgroup$
    – Richi Wa
    Commented Jun 9, 2015 at 8:27
  • $\begingroup$ @Richard. The introduction to the manual gives a lot of details about the compilation and use of PPP statistics. All users of these statistics should be acquainted with the material here. Other parts of the manual may be read if relevant. $\endgroup$
    – user1483
    Commented Jun 11, 2015 at 20:24

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