The two factors that afffect the demand for a currency are: 1. Interest rates for the deposits in that currency 2. Expected future spot rates Wouldn’t 1 imply that with higher rates you would expect and appreciation of the currency? The parity relationships tell us that high nominal rates will lead to depreciation. What up?
Isn’t 1) about real rates? I’m also slightly mixed up about this.
If fischer holds then real rates don’t change. I am like you…I don’t know what assumptions are built in here.
It is very confusing because you don’t know whether they are using real or nominal (covered vs uncovered interest rate parity vs fisher etc).
Screw it. I am going to try sample 3. Hopefully it isn’t another bloodbath.
mwvt9 Wrote: ------------------------------------------------------- > The two factors that afffect the demand for a > currency are: > 1. Interest rates for the deposits in that > currency > 2. Expected future spot rates > > Wouldn’t 1 imply that with higher rates you would > expect and appreciation of the currency? > > The parity relationships tell us that high nominal > rates will lead to depreciation. > > What up? It could be that this in the shot run. Currency flows to the country with high interest rates thus appreciating that country’s currency…The parity relationships do hold but only in the very long run (could be years before they catch up).
the problem is that none of the parity methods really work so I guess it’s all up to interest rates (cost of holding) and expected future (benefit) in the short run this is all that matters not that i am very clear on this
Could it also mean that the Spot rate will appreciate quickly with a rise in rates but the expected spot will then go down ----> depreciation?
Maybe asset market approach in short run --> demand for currency drives up interest rates, hence appreciation?