My understanding is that interest interest rate parity is used to calculate forward rates in the future whereas purchasing the spot rates in the future
The exchange rate between 2 countries can be calculated using purchasing power parity . Can we also use interest rate parity for this ?
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AFMInterest rate parity , purchasing power parity
7y ago#1It is always interest rates that determine the forward rates.
Inflation rates are a way of forecasting future spot rates (purchasing power parity).
In theory inflation rates and interest rates move together and so using interest rates would in theory give the same result as using inflation rates, but in the exam you would only use interest rates to forecast future spot rates if you were not given inflation rates.
I do explain all of this in my free lectures.
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