interest rate parity

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Related to interest rate parity: International Fisher effect, Purchasing power parity

Interest Rate Parity

A theory stating that the difference between interest rates in two countries is the difference between the foreign exchange rate and the spot rate of their two currencies. According to this theory, when one makes two fixed investments in two different currencies, the return on both investments are the same even though interest rates may be different in absolute terms. See also: Purchasing power parity.

interest rate parity

The interrelationship between currency exchange forward rates and spot rates that result from interest rate differentials. If interest rates are higher in the United States than in a foreign country, the forward dollar value of the foreign currency will exceed the spot dollar value of the foreign currency.
References in periodicals archive ?
This study is designed to test whether interest rate parity holds after a negative interest rate has been activated by the central bank in three currencies: Yen, Swiss Franc, and Euro.
Both these subcomponents of the interest rate parity theory state that, in a context characterized by a free flow of capital, it's impossible to make profits by following the above mentioned strategies, as the offer and demand mechanism will ensure that the forward or future spot quotations will imply an appreciation of the currency with a relatively smaller interest rate, appreciation that, ceteris paribus, will be equal to the difference between the initial and the modified levels of the interest rate (6), thus annulling any potential profits and delivering an equivalence between investments made in one currency or another.
Our strategy, involve constructing multiple series of trade-weighted industry-specific real exchange rates and investigate whether the uncovered real interest rate parity holds for 18 industries ranging from the more consumer-oriented, such as furniture and fixtures, to more intermediate and primary levels such as plastics and chemicals.
A study conducting empirical investigation based on CPI-based real interest rates is used to conclude that real interest rate parity is not supported in a paper by Lin Wu and Lin Chen (Wu & Chen, 2007).
According to uncovered interest rate parity, it is predicted that currencies yielding a high return will depreciate; however, an increase in real interest rate will appreciate the currency.
3) The implication is that the purchasing power parity condition is likely to be strongly related to the uncovered interest rate parity.
A translation method which provides comparability is easily found using the interest rate parity principle.
cogency of the argument based on the interest rate parity can be
Xing (2002), 'Uncovered Interest Rate Parity and the Term Structure,' NBER working paper #8795.
As can be seen, under the assumption of uncovered interest rate parity, the expected exchange rate is inside the crawling bands during most of the period.
Using an uncovered interest rate parity framework, the authors study the potential impact of a shift in market expectations regarding a country's euro area entry date on long-term yields and the spot exchange rate.
dollar come under pressure for interest rate parity with the United States.

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