Parity Theories

Parity Theories

Parity Theories

Purchasing power parity

The quantity theory in its original formulation has operated in a static economy, in which the role of bank intermediation was very low and the actual currency primarily exerted the function of means of payment. The old theoretical framework does not give, therefore, due attention to the demand for money as a precautionary measure. The version that made it the next school in Cambridge is clearly the direct testimony of dissatisfaction that stemmed from an examination of Fisher's theory. The approach of the liquid stocks simply move the point of view, the currency that circulates in the economy, as is summarized by the equation in the tradition of trade, the role of money (like stock) in which the individuals have to deal with future needs and contingencies (Kim, 2000, pp. 491-503). 

With the thought of Robertson, the quantity theory of money, now taking its foundation to the concept of the stock of cash in real terms, defines money as consistency, held by the public in addition to the normal requirements of an exchange, not least to meet the need for individuals to always have the purchasing power you want. From a formal point of view, with reflection of Robertson, which further refines the detection method followed by the Cambridge school, moving from a concept of money flow to a problem of storage media of the same economy, which is expressed by the percentage of resources that you want to keep in terms of purchasing power. Moving in this direction, Keynes says that the theory of Fisher and Pigou scheme are difficult to compare between them, since the price index should measure the purchasing power of money in the two models is very different and completely unsatisfactory. Pigou, indeed, by estimating the value of money holdings in terms of grain, avoid rather than resolve, the issue of inflation. The underlying objective of any quantity equation, however, as Keynes stresses is not discovering the price of wheat, but the purchasing power of money (Diebold, Husted and Rush, 2001, pp. 1252-1271).

The choice between these two methods of analysis is irrelevant, because each of the two schemes in its operating environment, has its own advantages and just the same as Robertson admits. Time: "We can put our attention or the amount of money outstanding at a given instant, or the flow of money that is used in a given period of time." 

On the other hand, are critical estimates of the costs of operators? The decisions of individuals to buy, sell or refrain from eating, existing price levels, are motivated by the opportunity to decrease, increase or leave unchanged their real money holdings (Alan and Mark, 2004, pp. 89-45). Therefore, according to the position of Keynes, in normal economic conditions, it creates a perpetual flow of trade between purchasing power and assets, and vice versa, which momentarily increase the liquid monetary resources and stocks of real individuals and decreases those of others, leaving the overall resources of the community approximately constant. 

Fisher effect

The Fisher effect establishes the relationship between interest rates and anticipated inflation ...