International Fisher effect

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The International Fisher effect is a hypothesis in international finance that says that the difference in the nominal interest rates between two countries determines the movement of the real exchange rate between their currencies, with the value of the currency of the country with the lower nominal interest rate increasing.

[edit] Motivation

The Fisher hypothesis says that the real interest rate in an economy is independent of monetary variables. If we add to this the assumption that real interest rates are equated across countries, then the country with the lower nominal interest rate would also have a lower rate of inflation and hence the real value of its currency would rise over time.^[1]

[edit] References

1. ^ Mishkin, Frederic S.. The Economics of Money, Banking, and Financial Markets (8th ed.).