Explanation and proof of the interest parity condition.
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Everyone pays a tax of 10 percent on interest and capital gains. Does this tax alter the analysis of the interest parity condition?
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Before I answer this question, I'll discuss some of the fundamentals of interest parity (just in case you need a refresher).
The interest parity condition states that in an open economy, an interest rate above the world parity should lead speculators to expect a currency depreciation, not appreciation.
Covered interest parity is a condition that relates interest differentials to the forward premium or discount.
It begins with the interest parity condition:
(1+R) = ...
Solution Summary
This solution is comprised of a simple explanation of how the payment of tax alters the interest parity condition.
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