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International Capital Market Relationships We discussed five international capital market relationships: relative PPP, IRP, UFR, UIP,...

International Capital Market Relationships We discussed five international capital market relationships: relative PPP, IRP, UFR, UIP, and the international Fisher effect. Which of these would you expect to hold most closely? Which do you think would be most likely to be violated? Explain your answer.

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I believe that the International Fisher Effect will be held most closely. The market is assumed to be a perfect market place where all information is available to everyone at the same time. So, the forward rates and the spot rates will become the same due to the actions of the market. The changes in the nominal interest rate will represent the changes in the spot market. Thus, there is more possibility of the International Fischer Effect to hold good.

Among the 5 theories that have been stated in the question, I believe that the theory that will be violated is the PPP (Purchasing Power Parity). This is because, its assumptions like there are no transportation cost, no cost in converting currency and no restrictions in the movement of commodities from one country to another are unrealistic. These assumptions are invalid in today’s world and hence, the PPP theory will be violated in real life.

jeff jeffy answered 2 years ago
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