What Forex says about cheap travel

The 2007-9 Financial Crisis turned Iceland into a major tourist destination, as a newly cheap currency combined with affordable flights and natural beauty. For anyone with plenty of time and a moderate amount of money, chasing the newly-cheap destination seems like a good travel strategy.

Since January 2020, here are the countries where the US dollar has gained the most vs the local currency:

Calculated using https://fx-rate.net/USD/?date_input=2020-01-01
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Hyperinflationary Efficiency?

I’m advising a senior thesis for a student who is examining the strength of Purchasing Power Parity in hyper-inflationary countries. Beautifully, the results are consistent with another author* who uses a more sophisticated method.

For those who don’t know, absolute purchasing power parity (PPP) depends on arbitrage among traders to cause a unit of currency to have the same ability to acquire goods in two different countries. If after converting your currency you can afford more stuff in foreign country, then there is a profit opportunity to purchase there and even to re-sell it in your home country.

Essentially, when you make that decision, you are reducing demand for the good in your home country and increasing demand in the foreign country (re-selling affects the domestic supply too). Eventually, the changes in demand cause the prices to converge and the arbitrage opportunities disappear. At this point the two currencies are said to have purchasing power parity – it doesn’t matter where you purchase the good.

So does PPP hold? One way that economists measure the strength of PPP is by measuring the time that it takes for a typical purchasing power difference to be arbitraged away by 50% – its ‘half-life’.  The more time that is required, the less efficient the markets are said to be.

The ex-ante question is: Is PPP be stronger or weaker during hyperinflationary periods?

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