International Fisher Effect Calculator

International Fisher Effect Formula:

\[ \text{Exchange Rate Change} = \frac{(1 + \text{Domestic Rate})}{(1 + \text{Foreign Rate})} - 1 \]

Expected Exchange Rate Change:

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1. What is the International Fisher Effect?

The International Fisher Effect (IFE) is an economic theory that states that the expected change in the exchange rate between two currencies is approximately equal to the difference between their nominal interest rates. It extends the Fisher effect to international finance.

2. How Does the Calculator Work?

The calculator uses the International Fisher Effect formula:

\[ \text{Exchange Rate Change} = \frac{(1 + \text{Domestic Rate})}{(1 + \text{Foreign Rate})} - 1 \]

Where:

Domestic Rate — Nominal interest rate in the domestic country
Foreign Rate — Nominal interest rate in the foreign country

Explanation: The formula calculates the expected percentage change in the exchange rate based on interest rate differentials between two countries.

3. Importance of IFE Calculation

Details: Understanding IFE helps investors and businesses predict currency movements, manage foreign exchange risk, and make informed international investment decisions.

4. Using the Calculator

Tips: Enter both domestic and foreign interest rates as percentages (e.g., for 5%, enter 5). The calculator will show the expected percentage change in the exchange rate.

5. Frequently Asked Questions (FAQ)

Q1: Does IFE always hold true in reality?
A: No, IFE is a theoretical concept. In practice, exchange rates are influenced by many other factors beyond interest rate differentials.

Q2: What's the difference between IFE and Purchasing Power Parity (PPP)?
A: IFE focuses on interest rate differentials, while PPP focuses on inflation differentials and price levels.

Q3: Should I use real or nominal interest rates?
A: The IFE uses nominal interest rates, which already incorporate inflation expectations.

Q4: How does this relate to uncovered interest rate parity?
A: IFE is essentially the same as uncovered interest rate parity, both predicting that currency depreciation will offset interest rate advantages.

Q5: What time period does this calculation apply to?
A: The calculation applies to the same time period as the interest rates used (e.g., annual rates give annual exchange rate change expectations).