 # Interest Rate Confusion

I cant reconcile the real interest rates beign higher in a nation causing a currency appreciation and nominal causing a depreciation. It seems one or the other would hold. Lets Say Nominal 1.01 Country A Nominal 1.0 Country B Country A/Country B Exchange 1.0 1.0 x 1.01/1.0 = 1.01 forward A/B…currency depreciated If we substitute the word “real” wouldn’t the math still hold? n the other hand, higher real rates attract capital causing higher demand/lower supply of country A capital, thus appreciating currency - why wouldn’t nominal do the same assuming no inflation differentials? Is the mere use of “nominal” implying that since there is a difference it MUST be related to the difference in inflation and not the real rate? What about CFAI text reading 19 Question 1 using the term “interest rate”. Why is that not real rates, causing an appreciation in the currency? It seems to me that interest rate parity saying a higher rate leads to a currency depreciation contradicts the theory that higher real rates attract capital causing appreciation. How do we know when to apply which theory? Comments? Specifically explaining chap 19 CFAi text Q 1 would be cool - Question 13 is quite similar too. This confuses the crap out of me. How do we know what they mean by “interest rates” I cant reconcile these two’s movements having different effects on rates…

differences in IR’s; assume nominal, as Real rates are assumed equal

nicob Wrote: ------------------------------------------------------- > differences in IR’s; assume nominal, as Real rates > are assumed equal Ok, So when do we apply the situation where interest rates attract capital to an economy causing demand and supply to cause a currency appreciation? Will is specifically say “Real rates are higher” and in all other cases assume its a higher inflation differential and instead see it as a currency depreciator (is that a word)?

Aaagh, here is another contradiction in the CFAI econ book, page 669 # 20 they say the currency will depreciate because of FALLING NOMINAL RATES as a result of lower demand. What is the deal?

there is difference between instant effect and longer term effect. if a currency interest rates increase the immediate effect is that currency appreciates … central banks take this effect into account when making decisions regarding rates. that may be the reason why you are confused.