uncovered interest rate parity

[keep_running]

Just to confirm, does this proposition claim that the difference in the spot rates between year 0 and 1 is explained by the interest rate differences between the two currencies?

However, does the interest rate differential also explain the difference between the VALUE of the two currencies at a specific point in time?

Basically, that the currency with the lower value should have a higher interest rate to “offset” this lower value.

EDIT: Wondering the same thing for purchasing power parity, expect with inflation? Where the lower valued currency would have higher inflation than the more valuable currency in order to keep total ppp in effect.

[S2000magician]

@keep\_running

Just to confirm, does this proposition claim that the difference in the spot rates between year 0 and 1 is explained by the interest rate differences between the two currencies?

Yes.

@keep\_running

However, does the interest rate differential also explain the difference between the VALUE of the two currencies at a specific point in time?

Only relative value (compared to an earlier valuation), not absolute value.

@keep\_running

Basically, that the currency with the lower value should have a higher interest rate to “offset” this lower value.

Nope. It’s relative, not absolute.

@keep\_running

EDIT: Wondering the same thing for purchasing power parity, expect with inflation? Where the lower valued currency would have higher inflation than the more valuable currency in order to keep total ppp in effect.

You’re talking about absolute PPP.

IRP is analogous to relative PPP.