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The IFE suggests that the percentage change in the exchange rate over the investment horizon will...

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Finance

The IFE suggests that the percentage change in the exchangerate over the investment horizon will equal the interest ratedifferential between the two countries. ef = ih-if (textbooksection 8-2d.) Implying that if ih>if or interest in homecountry is greater than interest in foreign country, then theexchange rate should go up. This contradicts what we discussed inchapter 4 and 6. If interest rates go up in the home country , thenthe home currency should appreciate and the foreign currency shoulddepreciate.

How would you reconcile the two contradictingpredictions?

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The IFE suggests that the percentage change in the exchangerate over the investment horizon will equal the interest ratedifferential between the two countries. ef = ih-if (textbooksection 8-2d.) Implying that if ih>if or interest in homecountry is greater than interest in foreign country, then theexchange rate should go up. This contradicts what we discussed inchapter 4 and 6. If interest rates go up in the home country , thenthe home currency should appreciate and the foreign currency shoulddepreciate.How would you reconcile the two contradictingpredictions?

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