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Session 4: International Parity Relationships among Inflation, Interest Rates and Exchange Rates
Session Overview
A. Purchasing Power Parity (PPP) B. International Fisher Effect (IFE) C. Interest Rate Parity (IRP)
Session Objectives
A. Explain the purchasing power parity (PPP) theory and its implications for exchange rate changes B. Explain the International Fisher effect (IFE) theory and its implications for exchange rate changes C. Compare the PPP theory, the IFE theory, and the theory of interest rate parity (IRP)
2. Rationale behind Purchasing Power Parity Theory 3. Derivation of Purchasing Power Parity
8.1
8.2
Comparison of Annual Inflation Differentials and Exchange Rate Movements For Four Major Currencies
8.3
Illustration of IFE Line (When Exchange Rate Changes Perfectly Offset Interest Rates Differentials)
8.5
7.9