Price level variations as predictors of flexible exchange rates

Abstract. The aim of this study is to investigate the relationship between relative price levels and exchange rates with the view of establishing the validity of the purchasing power parity theory. Included in the paper is a discussion of the interpretation of such analyses in an efficient market context. between two countries A and B as long as no alteration is made in the purchasing power of either currency. This concept is referred to as the Purchasing Power Parity (PPP) theorem. More specifically, if inflation takes place in the currency of country A, the value of A's currency in country B should be reduced by the proportion in which the purchasing power has been diminished b