Volume-7, Number - 1  
Month: January - June, 2011
An Empirical Evidence of Portfolio Balance Model of Exchange Rate Determination : A Study on Indian ₹ vs US $

Ajaya Kumar Panda
IBS-Hyderabad (AP)
Page No. 1

Purpose/Aim: Various Exchange rate arrangements have existed in different countries over the years, and whatever the arrangement, a question of fundamental importance is always existed that what are the determinations of exchange rate?.

Methodology/Approach :In the context of fixed exchange rate arrangements, same thing can be asked as what are the fundamental influences on the behaviour of exchnage rate?. An answer to this question enables an analysis of interrelationship and dynamic link between exchange rate and the macroeconomic variables.

Findings/Conclusion: The earliest known theory was that of "purchasing power parity (ppp)" whci was given a concrete form by Gustav Cassel in 1920s. It relates nominal exchange rates to ational price levels and a lot of attention has been focused on its validity that has been challenged on both conceptual and empirical grounds.

Keywords: Even if the hypothesis of ppp is valid, however it only suggests a relationship between endogenous variables and therefore does not provide a complete model of nominal exchange rate.