Chapter 8 Relationships Among Inflation, Interest Rates, and Exchange Rates Lecture Outline Purchasing Power Parity (PPP) Interpretations of PPP Rationale Behind PPP Theory Derivation of PPP Using PPP to Estimate Exchange Rate Effects Graphic Analysis of PPP Testing the PPP Theory Why PPP Does Not Occur International Fisher Effect (IFE) Implications of the IFE for Foreign Investors Derivation This video discusses Chapter 8 Relationships among Inflation, Interest Rates, and Exchange Rates from book entitled International Financial Management, 7th Edition by Jeff Madura, Florida Atlantic Unformatted text preview: Chapter 8: Relationships among Inflation, Interest Rates and Exchange Rates Instructor: Cao Dinh Kien, Ph.D. Faculty of Business Administration Foreign Trade University [email protected] Chapter Objectives • Explain the purchasing power parity (PPP) theory and its implications for exchange rate changes • Explain the International Fisher effect (IFE) theory and its 1 8 Relationships among Inflation, Interest Rates and Exchange Rates Chapter Objectives This chapter will: A. Explain the purchasing power parity (PPP) theory and its implications for exchange rate changes B. Explain the International Fisher effect (IFE) theory and its implications for exchange rate changes C. Compare the PPP theory, the IFE theory, and the theory of interest rate parity (IRP Start studying Chapter 8: Inflation, Interest Rates and Exchange Rates. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Relationships between Inflation, Interest Rates, and Exchange Rates 1. CHAPTER 8 Relationships between Inflation, Interest Rates, and Exchange Rates 2. C8 - 2 Purchasing Power Parity (PPP) • When one country’s inflation rate rises relative to that of another country, decreased exports and increased imports depress the country’s currency.
1 Aug 2015 Chapter 8—Relationships among Inflation, Interest Rates, and Exchange Rates quiz.rtf - Free download as (.rtf), PDF File (.pdf), Text File (.txt) 11 Jan 2017 CHAPTER 8 Relationships between Inflation, Interest Rates, and Exchange Rates C8 - 2 Purchasing Power Parity (PPP) • When one country's This chapter presents simple models of exchange rate determination. underlying arbitrage argument, parity relations establish situations where economic Relative PPP: "U.K. inflation was 2% while Brazilian inflation was 8% . a survey of the PPP literature, Rogoff (1996) describes a consensus among PPP researchers. Access International Financial Management 12th Edition Chapter 8 solutions now. spending there resulted in a high level of inflation and high interest rates. What is the relationship between the exchange rates and relative inflation levels
Chapter 8: Relationships Among Inflation, Interest Rates, and Exchange Rates 113 ANSWER: Interest rate parity can be evaluated using data at any one point in time to determine the relationship between the interest rate differential of two countries and the forward premium (or discount). C. inflation and interest rates do not follow the law of one price. A. nothing to do with exchange rate movement. B. influence interest rates and taxation, and so may influence exchange rates. Fixed rate relationships among currencies could not stay fixed, according to Obstfeld and Rogoff, because As the inflation rate differential increases in favor of the foreign country, that country's goods become more and more expensive. Although economic theory outlines the relationship between inflation and currency exchange rates, actual evidence indicates that this relationship does not hold up in the short term. We find significantly strong correlations between stock return and book-to-market ratio, price-to- earnings ratio, return on assets, inflation, change in interest rate, and change in the exchange
Unformatted text preview: Chapter 8: Relationships among Inflation, Interest Rates and Exchange Rates Instructor: Cao Dinh Kien, Ph.D. Faculty of Business Administration Foreign Trade University [email protected] Chapter Objectives • Explain the purchasing power parity (PPP) theory and its implications for exchange rate changes • Explain the International Fisher effect (IFE) theory and its 1 8 Relationships among Inflation, Interest Rates and Exchange Rates Chapter Objectives This chapter will: A. Explain the purchasing power parity (PPP) theory and its implications for exchange rate changes B. Explain the International Fisher effect (IFE) theory and its implications for exchange rate changes C. Compare the PPP theory, the IFE theory, and the theory of interest rate parity (IRP Start studying Chapter 8: Inflation, Interest Rates and Exchange Rates. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Relationships between Inflation, Interest Rates, and Exchange Rates 1. CHAPTER 8 Relationships between Inflation, Interest Rates, and Exchange Rates 2. C8 - 2 Purchasing Power Parity (PPP) • When one country’s inflation rate rises relative to that of another country, decreased exports and increased imports depress the country’s currency.
11 Jan 2017 CHAPTER 8 Relationships between Inflation, Interest Rates, and Exchange Rates C8 - 2 Purchasing Power Parity (PPP) • When one country's This chapter presents simple models of exchange rate determination. underlying arbitrage argument, parity relations establish situations where economic Relative PPP: "U.K. inflation was 2% while Brazilian inflation was 8% . a survey of the PPP literature, Rogoff (1996) describes a consensus among PPP researchers. Access International Financial Management 12th Edition Chapter 8 solutions now. spending there resulted in a high level of inflation and high interest rates. What is the relationship between the exchange rates and relative inflation levels Chapter8 Relationships among Inflation, Interest Rates, and Exchange Rates J. (PPP) theory attempts to quantify this inflation exchange rate relationship. 8. 4 RATES SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER Relationships among Inflation, Interest Rates, and Exchange Rates Chapter8 J. Gaspar: Adapted from Jeff Madu ra, International Financial Management 8. 1 Start studying Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates. Learn vocabulary, terms, and more with flashcards, games, and other study tools.