Interest rate parity says if country A’s interest rate is currently higher than country B, then currency A is expected to depreciate against B to achieve the parity. Then another session says when a country’s interest rate is high, it tends to attract foreign investment, which makes the currency appreciate. Am I missing anything? How do you reconcile the two? Thanks!
there is another thread discussing this same issue on page one called 'FX something…" the way I understand it is that its different based on the question: If they are talking about supply/demand then the demand for the higher IR currency will increase causing appreciation If they are talking about interest rate parity then it depreciates for the parity relation to hold
if a country’s nominal interest is high (possibly due to high inflation), then its currency will depretiate. if a country’s real interest is high, then its currency will appretiate. it can be very confusing if they dun’d word it clearly
passme Wrote: ------------------------------------------------------- > if a country’s nominal interest is high (possibly > due to high inflation), then its currency will > depretiate. > if a country’s real interest is high, then its > currency will appretiate. > > it can be very confusing if they dun’d word it > clearly only problem with your second point is that if one country’s real interest rate is higher than the others then it implies that IRP does not hold…
I tend to think of it the same way as passme. If the real rate rises, then capital is attracted until IRP holds. The appreciation causes the real rates to equal again and for IRP to hold. Since capital can move really fast, IRP holds. It may be flawed logic but its how I am able to keep these straight.