Short-term and long-term

exchange rates
 Short-term exchange rates

European Central Bank becomes active

(e.g. purchase of government bonds)

reaction on the money market results in changes of the interest rate

investors shift their investments

reaction on the exchange market

change of the exchange rate

No inflation effects –
stagnating prices
 Long-term exchange rates

European Central Bank becomes active

(e.g. purchase of government bonds)

proportional change in prices = inflation rate changes

(Why? - Demand and supply changes on the labor and
goods markets)

change of the inflation rate  relative PPP  change of the

exchange rate

change of the inflation rate  Fisher Effekt  change of the nominal interest rate
R$ - R€ = πeUS – πeEU
R = interest rate
π = inflation rate
 Long-term exchange rates

change of interest rates results in a change of money demand

𝑀𝑀 1. Interest rate
2. Prices decrease PUS =
𝐿𝐿 (𝑌𝑌,𝑖𝑖) decrease
P = prices
M = money supply
L = money demand
Y = income
i = interest rate

price changes are accompanied by the absolute PPP and result in a

change of the exchange rates
3. Exchange rate 𝑃𝑃𝑈𝑈𝑈𝑈
E$/€ =
decrease/ 𝑃𝑃𝐸𝐸𝐸𝐸
Currency appreciation P = prices
E = exchange rate
 Long-term exchange rates

Income changes result in a change in money demand

𝑀𝑀
2. Prices decrease PUS = 1. Income increase
𝐿𝐿 (𝑌𝑌,𝑖𝑖)
P = prices
M = money supply
L = money demand
Y = income
i = interest rate

price changes lead via absolute PPP to a change of the exchange rate

𝑃𝑃𝑈𝑈𝑈𝑈
3. Exchange rate E$/€ =
𝑃𝑃𝐸𝐸𝐸𝐸
decrease/ P = prices
currency evaluation E = exchange rate