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Hi
I’m getting confused about when I should use PPP and when to use IRP.
I thought that PPP was used to predict future exchange rates however on the Sept 16 specimen paper it is calculated using the interest rates rather than inflation.Would you be able to better explain the distinction to me please as I’m getting myself confused!
Which question in the specimen paper are you referring to?
If it is question 1, then that question does not ask for a future spot rate, it asks for the forward rate and IRP is used to calculate forward rates.
When forecasting future spot rates, then PPP is the better predictor (although in theory PPP and IRP would give the same result because in theory inflation rates and interest rates should move together).
Have you watched my free lectures on this?
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