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

What factors lie behind capital inflows to developing world, Q. Wha...

Q. What factors lie behind capital inflows to the developing world? Answer: Several developing countries have received a lot of capital inflows that lead them to an

Effect on gdp, The recessionary gap in a country is $1 trillion. The spendi...

The recessionary gap in a country is $1 trillion. The spending multiplier is 5. For every $50 billion borrowed, interest rates increase by 0.1 %. For every 0.1% increase in interes

Does the existence of non-tradable goods allow for deviation, Does the exis...

Does the existence of non-tradable goods allow for deviations from Purchasing Power Parity? Answer:  Yes the continuation of non-tradable goods permits deviations from Purchas

Types of international transactions, Q. What types of international transa...

Q. What types of international transactions are recorded in the balance of payment accounts? Answer: Three kinds' transactions that involve exports and imports of goods and s

Economics, discuss the central economic problem facing this group of surviv...

discuss the central economic problem facing this group of survivors.

What are main factors determining the aggregate money demand, Q. Wh...

Q. What are the main factors determining the aggregate money demand? Answer: Three major factors: the price level, interest rate and real national income. A increase i

TRIPs, Describe the important benefits enjoyed by Indian companies through ...

Describe the important benefits enjoyed by Indian companies through TRIPs. Elaborate the main objectives of WTO in global economy.

Effects of an increase in the money supply, Q. What will be the effects of ...

Q. What will be the effects of an increase in the money supply on the interest rate? Answer: An enhance in the money supply will origins the interest rate to decrease. This m

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