Exchange Rates, Interest Rates, Inflation and the Risk Premium

Adam S. Iqbal ()

Chapter Chapter 3 in Foreign Exchange, 2022, pp 57-95 from Springer

Abstract: Abstract Exchange rates respond to changes in interest rates, inflation expectations and the risk premium. This chapter introduces fixed real exchange rate models, of which the well known Purchasing Power Parity (PPP) model is a special case that sets the real exchange rate to 1.0. Such models relate the expected future exchange rate to relative inflation expectations. Combining this idea with the concept of CIP from Chap. 2, the reader is able to understand the relationship between the FX spot rate, nominal interest rates and inflation expectations.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-93555-9_3

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DOI: 10.1007/978-3-030-93555-9_3

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