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The effects of U.S. monetary policy on international mutual fund investment

Gabriele Ciminelli, Journal of International Money and Finance https://www.sciencedirect.com/science/article/abs/pii/S0261560622000791

Expectations of Inflation and Interest Rate Determination (Anticipations inflationnistes et détermination des taux d'intérêt) (Las expectativas inflacionarias y la determinación del tipo de interés) https://www.jstor.org/stable/3866980

Published By: Palgrave Macmillan Journals

Guía Docente, Univercidad pontificia, Paolo Rodrigo Saona Hoffmann https://repositorio.comillas.edu/xmlui/bitstream/handle/11531/31542/Gu%C3%ADa%20Docente.pdf?sequence=1

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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 IFE would suggest that there should be no long-run impact on the exchange rate between the two currencies. However, in the short run, there could be fluctuations in the exchange rate due to changes in market expectations, political events, and other factors. These fluctuations could have an impact on imports and exports, as well as on the domestic economy as a whole.

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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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In this case, the IFE would suggest that the domestic currency should appreciate relative to the foreign currency to maintain parity between the two currencies. An appreciation of the domestic currency would make exports more expensive and imports cheaper. This would lead to a decrease in exports and an increase in imports, which could help to reduce the trade surplus.

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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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In this case, the IFE would suggest that the domestic currency should depreciate relative to the foreign currency to maintain parity between the two currencies. A depreciation of the domestic currency would make exports cheaper and imports more expensive. This would lead to an increase in exports and a decrease in imports, which could help to reduce the trade deficit.

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Interest rates

Trade flows

Political events

Shifts in inflation rates

Relative income levels

Governmental controls

Exchange rate future expectations

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The implications of changes in interest rates on the IFE can be significant. For example, if a country raises its interest rates, it could attract more foreign investment as investors seek higher returns. This could lead to an increase in demand for the country's currency, causing it to appreciate relative to other currencies.