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Melissa estrada Lopez
2866429
Act 9

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The Fisher Effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, real interest rates fall as inflation increases, unless nominal rates increase at the same rate as inflation.

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The IFE expands on the Fisher Effect, suggesting that because nominal interest rates reflect anticipated inflation rates and currency exchange rate changes are driven by inflation rates, then currency changes are proportionate to the difference between the two nations' nominal interest rates.

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Case: Home and foreing inflation and interest rate are similar.

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Case: Home and foreing inflation and interest rate are similar.

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A different indebtedness is not generated to those that will already be had with respect to the interest rate that the person manages in the local country since when moving to a foreign country, inflation and the interest rate will continue the same indebtedness in any of the countries

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Case: Home inflation and interest rate are lower compared to the foreing country.

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Case: Home inflation and interest rate are lower compared to the foreing country.

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• Low-interest rates do not commonly attract foreign investment.
•Low and stable inflation is an indicator of macroeconomic stability that helps individuals and companies make investment decisions with confidence.

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Case: Home inflation and interest rate are higher compared to the foreing country.

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Case: Home inflation and interest rate are higher compared to the foreing country.

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•An extremely high inflation rate is very likely to impact the country's exchange rates with other nations negatively.
•Higher interest rates tend to attract foreign investment, which is likely to increase the demand for a country's currency.

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•Team, I. (2021, March 30). International Fisher Effect (IFE): Definition, Example, Formula. Investopedia. https://www.investopedia.com/terms/i/ife.asp#:~:text=The%20rationale%20for%20the%20IFE,country%20with%20lower%20interest%20rates.
•Hayes, A. (2022, June 2). Fisher Effect Definition and Relationship to Inflation. Investopedia. https://www.investopedia.com/terms/f/fishereffect.asp#:~:text=The%20Fisher%20Effect%20states%20that,the%20same%20rate%20as%20inflation.
•Hayes, A. (2022b, June 2). Fisher Effect Definition and Relationship to Inflation. Investopedia. https://www.investopedia.com/terms/f/fishereffect.asp#:~:text=The%20Fisher%20Effect%20states%20that,the%20same%20rate%20as%20inflation.

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IFE: should the domestic currency appreciate or depreciate? 

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IFE: should the domestic currency appreciate or depreciate? 

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Historically, in times when interest rates were adjusted by more significant magnitudes, the IFE held more validity. However, in recent years inflation expectations and nominal interest rates around the world are generally low, and the size of interest rate changes is correspondingly relatively small. Direct indications of inflation rates, such as consumer price indexes (CPI), are more often used to estimate expected changes in currency exchange rates.

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Implications would the IFE have on imports and exports

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Implications would the IFE have on imports and exports

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●Shifts in inflación rates
●Relative income levels
●Governmental controls
●Exchange rate future expectations