for Macroecomy , it seems contradict with what we learned from finance. if country A has lower interest rate, say 0.01, country b higher interest rate, say 0.2. in macroeconomy, the country B with higher interest rate attract foreign capital inflow, so increase the demand for domenstic currency is country B, so currency in country B appreciate. but if use the fomula to calculate forward arbitrage free price of exchange rate, the currency in country B actually depreciate against currency in A. is it? confusing. Thanks.
well it’s contradicting because you use different time the finance forumula of arbitrage- irp holds- equilibrium macroecon - you are considering status before equilibrium look at it this way - a domestic currency depreciates so people will buy foreign and deposit at foreign in rate. at one point there is too much demand for deposits in foreign banks so interest rate will fall until interest parity rule holds now this is a very simplistic theoretical approach. but that is the thing with econ theories. a lot don’t hold in real economy