Purchasing power parity and interest rate parity

This topic has 3 replies, 2 voices, and was last updated 8 years ago by John Moffat.

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September 6, 2017 at 10:42 pm #406241
myacca1990
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It is confusing to identify the base country and overseas country when calculating interest rate parity and PPP .Any tips how to overcome this problem?
September 7, 2017 at 7:27 am #406291
John Moffat
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As I explain in my lectures, the base country is the one for which the exchange rate is quote against.

So, for example, if the exchange rate is 1.5$ = 1 Pound, then ‘pound’ is the base country.
If the exchange rate is 1.2 Euros = 1 $, then ‘$’ is the base country.
September 7, 2017 at 9:45 am #406355
myacca1990
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@johnmoffat said:
As I explain in my lectures, the base country is the one for which the exchange rate is quote against.

So, for example, if the exchange rate is 1.5$ = 1 Pound, then ‘pound’ is the base country.
If the exchange rate is 1.2 Euros = 1 $, then ‘$’ is the base country.

Ok got it but what about the purchasing power parity?
September 7, 2017 at 12:47 pm #406382
John Moffat
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What about it? The rule about which is the base country is the same for both.

Interest rate parity is used to determine forward rates, purchasing power parity is used to predict future spot rates,
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