Another Theory – International Fisher Effect (IFE)
Tải bản đầy đủ
International Fisher Effect (IFE)
• The international Fisher effect (IFE) theory suggests that
currencies with higher interest rates will depreciate
because the higher rates reflect higher expected inflation.
• Hence, investors hoping to capitalize on a higher foreign
interest rate should earn a return no better than what they
would have earned domestically.
• If the British rate on 6-month deposits were 2% above the
U.S. interest rate, the £ should depreciate by
approximately 2% over 6 months. Then U.S. investors
would earn about the same return on British deposits as
they would on U.S. deposits.
International Executive Master of Business Administration
Why the IFE Does Not Always Occur
• Since the IFE is based on PPP, it will not hold when PPP
does not hold.
• For example, if there are factors other than inflation that
affect exchange rates, the rates will not adjust in
accordance with the inflation differential.
International Executive Master of Business Administration
Furthermore
• Assume that inflation in the US is expected to be
•
•
•
•
moderate
Therefore people will save more money since they are
less concerned to the possibility due to inflation.
Therefore there is a large supply of loanable funds
Therefore a low demand for loanable funds
Therefore a low Nominal Interest Rate.
Therefore the Nominal Interest Rate in the US should be
lower than in Canada because inflation is lower.
Real interest rate is the Nominal Rate of interest minus inflation
International Executive Master of Business Administration
The Fisher Effect Suggest:
• That the Nominal Interest Rate contains two components
1. Expected inflation
2. Real rate of interest
1. The “real rate of interest” is the Nominal Interest Rate minus the
expected inflation rate.
3. The International Fisher Effect is the effect to two
countries and the expected change in the exchange
rate. It suggest that difference in the Nominal Interest
Rate in the two countries is due to the difference in
expected inflation between the two countries.
International Executive Master of Business Administration
Implications of the Fisher Effect
• Currencies with a high interest rate will therefore have a
high expected inflation rate.
• Example:
US interest rate 8% and 5% in Japan the expected real
rate of return is 2% in each country
• US inflation rate is expected to be 6% - Japan 3%
• According to the PPP theory the Japanese yen is expected to
appreciate by the expected inflation differential of 3%
• If exchange rates change as expected – Japanese investors who
attempt to capitalize on the higher US interest rate will earn a similar
rate as they could have earned in there own country.
International Executive Master of Business Administration
Comparison of IRP, PPP, and IFE Theories
Interest Rate Parity
(IRP)
Interest Rate
Differential
Fisher
Effect
Forward Rate
Discount or Premium
Inflation Rate
Differential
Purchasing
Power Parity
International
Fisher Effect (IFE)
(PPP)
Exchange Rate
Expectations
International Executive Master of Business Administration
Vietnam Interest Rate History
US Interest Rate History
International Executive Master of Business Administration