International Fisher Effect (IFE)
An economic theory that states that an expected change in the current exchange rate between any two currencies is approximately equivalent to the difference between the two countries' nominal interest rates for that time.
Calculated as:
Where:
"E" represents the % change in the exchange rate
"i1" represents country A's interest rate
"i2" represents country B's interest rate Investopedia Says:
For example, if country A's interest rate is 10% and country B's interest rate is 5%, country B's currency should appreciate roughly 5% compared to country A's currency.
The rational for the IFE is that a country with a higher interest rate will also tend to have a higher inflation rate. This increased amount of inflation should cause the currency in the country with the high interest rate to depreciate against a country with lower interest rates. Related Terms:
Consumer Price Index - CPI
Exchange Rate
Fisher Effect
Inflation
Interest Rate
Nominal Interest Rate
Purchasing Power Parity - PPP |