Economics, Econometrics and Finance
8 years ago

Interest Rates Determine Exchange Rates, Impacting Global Economies

ZEW economic studies
Uncovered Interest Parity in Practice
Felix Hüfner

Paper Summary

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The article discusses how exchange rates are determined through trade of real assets and capital flows. It introduces two main concepts: purchasing power parity (PPP) and uncovered interest parity (UIP). PPP states that exchange rates equalize national price levels, while UIP states that exchange rate changes match interest rate differentials between countries. The chapter outlines the theory and methods for testing the UIP hypothesis.