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Up4
First point is correct as the currency with higher level of I/R should depreciate.
Second point is correct as well.
Just an example:
Restrictive Monetary Policy -> reduces money supply -> I/R would increase -> inflow of capital to the country -> which leads to the currency appreciation.Hope that helps.
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Up4
Thanks a lot, @vincentt and @sophie..
@sophie – International fischer condition was a discussion in the context of international parity conditions.. The first statement is a result of Covered and uncovered interest rate parity conditions..
But I think the difference in the term explains the difference in results 🙂
Thanks a lot.. -
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Up2
It depends on the freedom of capital movement and the definition of ‘with time’, i.e. what period we’re talking about (short / long term). We’ve discussed this question before with @vincentt at this useful thread about the Mundell-Fleming model.
In the international currency markets, I’d think that it assumes free, fluid capital movement between countries, therefore in the long run:
high interest rates –> inflow of capital –> currency appreciation (your second statement) –> fall in exports –> currency depreciation (your first statement)
The net effect depends on capital mobility.
I’m not sure how it relates to your comment on Fischer equation. Can you clarify?
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