interest rate parity

(redirected from Interest parity condition)

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 ?
In terms of the UIP condition, their article implies that the interest parity condition has a time-varying risk premium.
MONETARY POLICY AND THE UNCOVERED INTEREST PARITY CONDITION: AN ENDOWMENT ECONOMY
Uncovered interest parity condition: [i.sub.t] = [i.sub.t]* + ([e.sub.t-1.sup.e] - [e.sub.t]) (6)
(2) He introduces simple, but very clear, financial investor arbitrage behavior that seeks the highest global expected rate of return so that, at the equilibrium, the interest parity condition (3) must hold.
This requirement is the balance of payments (BP) in most cases, except for the interest parity condition in the Blanchard model.
The interest parity condition: e = [e.sup.e]/(1 + i - [i.sub.f]) (4)
They explain the large short-run shift in the effective interest parity condition -- or fire sale -- in terms of the weakening of a country's international collateral.
A major problem with testing the uncovered interest parity condition is that exchange rate expectations are unobservable.
The analysis tests the uncovered interest parity condition using the official market and black market exchange rates.