A Classroom Experiment on Exchange Rate Determination with Purchasing Power Parity
by David Mitchell, Robert Rebelein, Patricia Schneider, Nicole B. Simpson and Eric Fisher (February 2007)
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.
JEL Classifications: A22 Economics Education and Teaching of Economics in Higher Education; F31 Foreign Exchange