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FINDING INTERNATIONAL FISHER EFFECT TO DETERMINE THE EXCHANGE RATE THROUGH THE PURCHASING POWER PARITY THEORY: THE CASE OF MEXICO DURING THE PERIOD 1996-2012

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FINDING INTERNATIONAL FISHER EFFECT TO DETERMINE THE EXCHANGE RATE THROUGH THE PURCHASING POWER PARITY THEORY: THE CASE OF MEXICO DURING THE PERIOD 1996-2012

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This article has the purpose of verifying the international Fisher effect through the purchasing power parity.

Salas Ortiz A. (2015). “Finding International Fisher Effect to Determine the Exchange Rate trough the Purchasing Power Parity Theory: The case of Mexico during the period 1996-2012”. 16/10/2023. Retrieved from: https://www.usc.es/economet/reviews/aeid1518.pdf

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INTERNATIONAL FISHER EFFECT:A REEXAMINATION WITHINTHE CO-INTEGRATION AND DSUR FRAMEWORKS

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INTERNATIONAL FISHER EFFECT:A REEXAMINATION WITHINTHE CO-INTEGRATION AND DSUR FRAMEWORKS

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"The International Fisher Effect (IFE) is a theory in international finance which asserts that the spot exchange rate between countries should move in opposite direction with the interest rate differential between these countries. The aim of the following thesis is to analyze whether differences in nominal interest rates between countries and the movement of spot exchange rates between their currencies tend to move together over the long run."
Ersan E. (2008). “International Fisher Effect: A reexamination within the co-integration and DSUR frameworks”. 16/10/2023. Retrieved from: https://etd.lib.metu.edu.tr/upload/12610157/index.pdf

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Home and foreign inflation and interest rate are similar

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Home and foreign inflation and interest rate are similar

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The implications of having a similar interest rate and inflation, according to the IFE, would mean that there is a balance and thus, the exchange rate wouldn´t appreciate or depreciate, but it would remain stable.

Impacts on the Imports and exports:

The overall commerce amongst these countries would be relatively balanced since the prices of goods don´t have an advantage or disadvantage.

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Home inflation and interest rate are lower compared to the foreign country

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Home inflation and interest rate are lower compared to the foreign country

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The main impact that there would be according to the IFE and due to the home country´s lower inflation and interest rate would be that the currency be appreciated and thus making foreign investments more attractive to investors.

Implications on imports and exports:

Impact on exports: Since the currency is appreciated, this could lead to make exports more expensive to international markets. The home country´s goods may become less competitively priced for foreign buyers, since the currency is harder to obtain for foreign investors.

Impact on imports: Imports may become more affordable for the home country´s consumers since the import costs are lower and thus increasing them.

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Home inflation and interest rate are higher compared to the foreign country.

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Home inflation and interest rate are higher compared to the foreign country.

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There are several implications to be considered in the case where the inflation and interest rates were higher, mainly an impact on exchange rates leading to the depreciation of the domestic currency. Since the IFE states that countries with higher interest rates experience higher rates of inflation, which leads to the depreciation of the home country´s currency.

The implications on imports and exports include:

Impact on Exports: Since the currency of the home country has been depreciated due to the high inflation, exports become more competitive in the international market since the goods of the home country are relatively cheaper for foreign buyers cause the currency is easy to obtain.

Impact on imports: Since the currency is depreciated, imports may become more expensive for the home country and thus reducing the amount of them on the country.

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Exchange rate model designed by the economist Irving Fisher in the 1930s. It is a future indicator that may predict future spot currency prices.

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Economic theory stating that the disparity between the exchange rate of two currencies is approximately equal to the difference between their countries´ nominal interest rates.
It states that countries with higher interest rates experience higher rates of inflation which result in currency depreciation.

It also assumes that a country with lower interest rates will see lower levels of inflations which will translate on an increase in the currency´s value of a country.