when S0 is DC/FC is the real exchange rate = S0*CPI(foreign)/CPI(domestic)? THanks.
Nope. Real rate Change is: DC/FC * Price of consumption basket in FC/ Price of consumption basket in DC
I have a problem with real rate change. If real rate changes, then does all the PPP, IRP etc, go up in the air??? Isn’t all of this predicated on real rate being constant? So in the case that its NOT, what do we do?