hassan

Thanks, that's helpful.

What if inflation is zero in both countries? Say for example, country A had a real and nominal interest rate of 4%, and country B had a real and nominal rate of 5%. Under interest rate parity, country A's currency would appreciate, so that returns are the same, right? But capital flows to the country with the higher real rates would make country B's currency appreciate and A's depreciate?

Still a bit confused.