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The IFE suggests that the percentage change in the exchange rate over the investment horizon will...

The IFE suggests that the percentage change in the exchange rate over the investment horizon will equal the interest rate differential between the two countries. ef = ih-if (textbook section 8-2d.) Implying that if ih>if or interest in home country is greater than interest in foreign country, then the exchange rate should go up. This contradicts what we discussed in chapter 4 and 6. If interest rates go up in the home country , then the home currency should appreciate and the foreign currency should depreciate.

How would you reconcile the two contradicting predictions?

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jeff jeffy answered 8 months ago
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