Strength And Limitations Of The International Catcher Theory

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The International Fisher Effect
The international fisher effect is based upon two theories, The first is the purchasing power parity and the second is the general fisher effect. The purchasing power parity mentions that exchange rates would move in ordered to offset the differential in the inflation rate of the country, while the fisher effect states that the expected real rate of return and rate of inflation can been seen in the nominal interest rate. The fisher effect and the international fisher effect are connected, but they are not the same. The international fisher effect is an expansion of the fisher effect, where the theory suggests that the changes in exchange rate would of a country is proportional to the difference in nominal interest rate between the two countries. So international fisher effect analyses the current interest rate and future interest rate between countries to predict the foreign exchange movements. The international fisher theory suggests that countries that have high interest rate will have a high nominal interest rate (as it reflects the countries inflation) and the currency of the country would weaken (depreciate). .

Strengths and limitations of the International Fisher Effect
The IFE can be utilized to clarify and demonstrate the connection between a nations inflation rate,
Interest rate and exchange rates. The IFE hypothesis can be utilized as a part of anticipating the exchange rates between nations over the long run

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