exchange rates


country A’s Interest rate (Ra) = 10%

country B’s interest rate(Rb) = 5%

so a person borrows B at 5% and conveerts it to A and invests in A to make profit. When he converts B to A he is effectively increasing demand for A and decreasing demand for B so this should lead to appreciation in the currency A’s value relative to B which is agains the interest rate parity. Can somebody tell me the right mechanism as to how exactly does this happen?


Interest rate parity seems to be at odds with capital account influences which say as the interest rate rise so does the investments in the country and hencce the aggregate demand increases and thus the exchange rates. Which one is correct.

Can someone explain this lucidly?

think about the real word. a carry trade trade between JPY and AUD.

JPY, low interest rate, so the funding currency, expansive monetary policy, low growth, trying to boost exports.

AUD, high interest rate, high exports, high demand, higher growth.

you can’t just pick venezuela and hope for the best.

I posted the same question yesterday.

The next few days, I don’t have time to think about this in detail but I’m definitely coming back to it in a week or so… I’ll post if I end up understanding it

go back to your post. I have posted my thoughts there. I want to know what you think of them