St = Pt-P * t + C
在上面的等式中，“C是一个常数，S是以外币为单位表示的每种外币的汇率的对数，P和P *是国内和外国的价格水平。在C = 0的情况下，等式将实现PPP的绝对值保持，如果c不等于0，则表示相对PPP成立。
“The flexible price monetary model”
The flexible price monetary model emerged as a vital model for understanding of the exchange rate (Devereux & Engel, 2003) . The monetary models for the determination of the exchange rates starts with the assumptions related to the perfect capital mobility. Two important terms includes the PPP and the interest rate parity conditions which are used for the determination of the equilibrium conditions (Girton & Roper, 1977).
The primary block of the model assumes that the purchasing power parity is held in a continious manner.
St = Pt – P *t + C
In the above equation, ‘C is a constant, S s the logarithm of the rate of exchange which is expressed in units of home currency for every foreign currency and P and P* are the domestic and foreign levels of price. In case the value of C=0, equation would implement that absolute value of PPP holds and if c is not equal to 0 it states that relative PPP holds true.
The secondary block for the model assumes that the stable money function for demand is possible both in case of domestic countries and foreign nations. The market conditions in which money exchange rates are determined is dependent on the logarithm of the real income, y and the logarithm of the price level, p and nominal interest rate, i. In addition to this, for the calculation of the exchange rate for foreign currency an identical relationship can be assumed by considering this model.
In the equations the foreign variables are measured by the use of asterisk.