I’ve been trying to reconcile the two concepts but I couldn’t. Let’s say we take EUR and USD for the example. In reading 17, one of the factors affecting a currency’s supply and demand is the domestic interest rate. So if the Euro interest rate is higher relative to USD interest rate, the demand for Euro will increase and (one would think) that EUR will appreciate against USD. But the Interest Parity basically says that it’s the other way around. Meaning if EUR interest is 6% and USD interest is 9%, EUR will actually APPRECIATE (to compensate for its lower interest rate). Can someone please help me to understand this and reconcile the two? Thanks!
Your first statement seems to align with an increase in real interest rates, while your second seems to coincide with nominal interest rates.
hey Ray where have you been? didnt even see many messages from you on the email group. How are you doing?
Thanks Bryan! Sumz I’ve been crazy busy. Just panicking now for June 6th How are you?
june 6 - worried about the hangover from the celebration?
Take a look at p299 in schweser. They mention REAL interest rates. A higher REAL U.S interest rate will increase dollar demand.
What would real interest rate parity look like, if there is such a thing? Is the assumption that differences in real rates cannot persist?
Yes sy84, that would be the assumption of International Fisher Relation…real interest rates are equal accross boarders in the Long Run.
sy84 Wrote: ------------------------------------------------------- > What would real interest rate parity look like, if > there is such a thing? Is the assumption that > differences in real rates cannot persist? The assumption is real rates across all nations are the same. Taken a step further, it also assumes no real exchange rate risk exists.