Explain interest rate differential according to ppp theory, International Economics

Assignment Help:

Describe and explain the relationship between expected inflation rates in two countries and their interest rate differential according to the PPP theory.

Answer:  Expected price rises is given by the following equation:

_e= (Pe - P)/P where Pe is the expected price level in a country a year from today.

If relative PPP is expected to embrace then:

(Ee$/E - E$E)/E $/E = _US,t - _E,t.

Join the expected version of relative PPP with the interest parity condition R$ = RE+ (Ee$/E - E$/E)/E$/E

Rearrange

R$ - RE = _US,t - _E,t

If since PPP predicts currency depreciation is expected to offset international inflation differences the interest rate difference should equal the expected inflation difference.

 

 


Related Discussions:- Explain interest rate differential according to ppp theory

International economics: Theory & policy, In a day of production, firms in ...

In a day of production, firms in angola can produce 200 liters of oil or 10 kilograms of tungsten. Firms in Namibia can produce 160 liters of oil or 60 kilograms of tungsten. Which

Discuss studies based on the interest parity conditions, Q. Discuss ...

Q. Discuss studies based on the interest parity conditions. Answer: Generally the formula doesn't hold and isn't a good predictor of future devaluations. Even poorer it

CSA, what is meant by country specific advantage?

what is meant by country specific advantage?

Explain why despite enormous natural resources, Q. Explain why despite enor...

Q. Explain why despite enormous natural resources, much of Latin America's population remains in poverty and the region has been repeatedly experiencing financial crises. Answe

Opportunity cost, what is the criticism of opportunity cost

what is the criticism of opportunity cost

Balance of payments accounts, Q. "The balance of payments accounts seldom b...

Q. "The balance of payments accounts seldom balance in practice." Discuss. Answer: True the major reasons are due to the fact that data received or collected from different so

Differencial treatment, difference between differencial treatment in revers...

difference between differencial treatment in reverse andspecial and differencial treatment

Describe the effects of the smoot-hawley tariff, Q. Describe the effects of...

Q. Describe the effects of the Smoot-Hawley tariff imposed by the United States in 1930. Answer: It had a damaging consequence on employment abroad. The foreign response occu

What can one learn from the following figure, Q. What can one learn from th...

Q. What can one learn from the following figure? Answer: The figure shows the U.S. current account as well as net foreign wealth from 1977 until 1996. It illustrate that a

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd