One of the problems associated with use of the PPP Model is the technical difficulty involved in deriving acceptable estimates of equilibrium exchange rates (Humpage & Karamouzis, 1986, p. 2). Without such estimates, meaningful assessments of exchange rate level may not be made. These difficulties stem from (1) the use of different measure in inflation in various countries, and (2) the selection of a base period for analysis. Lastly, the problems associated with the use of the PPP Model may be traced to the model's inability to account for factors other than inflation, which also affect currency exchange rates.
Actual price levels in the French economy, however, were uniformly higher than those in the German economy across the entire 1975-1994 period. Further, differences in absolute price levels between France and Germany continued to widen across the entire period 1975-1994, although the proportional increase in year-to-year inflation in France compared to the similar experience in Germany began to decline subsequent to 1986. The continued widening in absolute price levels is consistent with both the trend pattern in actual currency exchange rates and the PPP projected trend pattern in the currency exchange rate for the French Franc and German Deutschmark across the entire 1975-1994 period of interest.
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