why interest rate parity is more likely to hold in the short run than relative purchasing power parity? if interest rate parity is not hold, than arbitrage will bring it to hold. if relative purchasing power parity not hold, will that create arbitrage opportunity, which will eventually make it to hold? Thanks.
Arbitrage isn’t readily available to bring purchasing power into line. It’s harder to profit off a global discrepancy in the price of jeans, for example, than financial instruments.
However, interest rate parity can only be sure to hold if there is covered interest rate arb which means forward contracts and risk-free bonds exist and are tradable. Even if they don’t exist, relative purchasing power parity is a very weak effect.