International Economics
Interest rate parity is a financial theory that posits a relationship between the interest rates of two countries and the exchange rates of their currencies. This concept suggests that the difference in interest rates between two countries will be equal to the expected change in exchange rates over time, ensuring that investors cannot earn arbitrage profits from discrepancies in interest rates across currencies. It plays a crucial role in exchange rate determination, influencing fixed and floating exchange rate regimes, managed floats, macroeconomic policies, and the evolution of the international monetary system.
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