The International Fisher Effect (IFE) and Interest Rate Changes by Yoskua Angel Gómez Tovar

yoskua2003 — 2025-03-16 01:18:14 UTC

The IFE states that the difference in nominal interest rates between two countries is directly proportional to the expected change in exchange rates.

Case 1: Higher Home Inflation and Interest Rates vs. Foreign Country

yoskua2003 — 2025-03-16 01:19:21 UTC

📉 Expected Currency Depreciation
🔹 Impact on Exports: More competitive, leading to an increase in foreign demand.
🔹 Impact on Imports: More expensive, leading to reduced domestic demand.
(Source: ResearchGate, 2025)

Case 2: Lower Home Inflation and Interest Rates vs. Foreign Country

yoskua2003 — 2025-03-16 01:19:41 UTC

📈 Expected Currency Appreciation
🔹 Impact on Exports: Less competitive, leading to lower demand abroad.
🔹 Impact on Imports: Cheaper, increasing domestic consumption of foreign goods.
(Source: OSF, 2025)

Case 3: Similar Inflation and Interest Rates in Both Countries

yoskua2003 — 2025-03-16 01:21:22 UTC

⚖ Stable Exchange Rate
🔹 Neutral impact on trade, as currency value remains stable.
(Source: Economic Journal, 2025)

yoskua2003 — 2025-03-16 01:22:01 UTC

Higher interest rates → Higher expected inflation → Currency depreciation

yoskua2003 — 2025-03-16 01:22:10 UTC

Lower interest rates → Lower expected inflation → Currency appreciation
(Source: Investopedia, 2025)

yoskua2003 — 2025-03-16 01:23:22 UTC

Empirical studies on the validity of the IFE have yielded mixed results. For instance, a study examining the IFE between Bangladesh and its major trading partners found limited support for the theory, suggesting that other factors also play crucial roles in determining exchange rates.

yoskua2003 — 2025-03-16 01:23:29 UTC

Similarly, research focusing on Serbia and the European Union indicated that while there is some correlation between interest rate differentials and exchange rate movements, the relationship is not as strong as the IFE would predict.

yoskua2003 — 2025-03-16 01:32:38 UTC