wxs1986

Like zazu11, I am confused about the relationship. The flipside to ro424's argument is that I would invest in the currency with higher interest rate returns. Hence expansionary fiscal policy is expected to raise currency appreciation by increasing interest rates.

I think the key is differentiating between real rates and nominal rates. Parity relations are for nominal rates and assume real rates are constant. So for two currency which differ in nominal rates, it implies a difference in inflation rates. I can then tie interest rate parity to international Fischer effect.

What would REAL interest rate parity look like then? Please correct me if I am wrong with my logic.