Does interest rate parity imply that interest rates are the same in all countries? Why might purchasing power parity fail to hold?
Interest rate parity deals with interest rates and exchange rates. Interest rate parity does not mean that the interest rates would be the same in all countries. What it implies is that the forward exchange rates would track the interest rate differentials between the countries. What this means is that in a country where interest rates are high relative to another country, the exchange ...
The solution explains the the concepts of interest rate parity and purchasing power parity.