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Created 3/10/1998
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Interest Rate Differentials and the Exchange Rate

J. Bradford DeLong
delong@econ.berkeley.edu
http://www.j-bradford-delong.net


The current level of the exchange rate--relative to the long-run purchasing-power-parity level at which representative baskets of commodities have the same price at home and abroad--depends on curent and expected future interest rate differentials between home and abroad.

When home interest rates are above or are expected to be above foreign interest rates, the exchange rate will be appreciated above its purchasing-power-parity level. When home interest rates are below or are expected to be below foreign interest rates, the exchange rate will be depreciated below its purchasing-power-parity level.

Short-Run Value of the Exchange Rate    Interest and Exchange Rates  


Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/

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