Econ Q: interest rate and currency mvmt

currency, interest, Because, however

Hi All,
I’m confused by the relationship between interest rates and currency appreciation/depreciation.
From the text of Reading 19 summary, it says: “factors causing a country’s currency to appreciate include lower inflation and higher real interest rates”
however, EOC #1 answer says: ‘Because the interest rate in A is greater than the interest rate in B, [A’s currency] is expected to depreciate …]
Is it due to real vs. nominal r??

sabre

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发表于 2013-3-31 13:00 | 只看该作者

Yes, higher real interest rates will lead to appreciation. Think of it that more people will want to invest in the higher real rates, which causes an increase in demand for that currency, which causes it to appreciate.
It is often assumed that real interest rates are the same in all countries though. With that assumption, higher nominal rates means higher expected inflation. Higher inflation causes rates to decrease.

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Econ Q: interest rate and currency mvmt

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