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Economic Growth in the Developed and Developing Economies

Economic growth is an increase in the production of economic goods and services, compared from one time period to another. Economic growth is calculated as the annual percentage change in real GDP or in real per capita GDP, where per…

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The Currency Crisis

A currency crisis is a situation where there is a sudden drop in a country’s currency, causing negative impacts on the economy by creating instabilities in exchange rates. Since it occurs abruptly and without warning, an effort has been made…

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Exchange Rate Intervention and Controls

Capital flows can be an advantage to a country if they increase domestic investment. It is worth noting that an increase in domestic investment leads to economic growth and subsequent currency appreciation, thereby attracting global investors. Even then, capital inflows…

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The Monetary and Fiscal Policies and Determination of Exchange Rates

Government policies have an impact on exchange rate fluctuations. These channels include: 1. The Mundell-Fleming Model This model stipulates that changes in monetary and fiscal policies within a country interfere with interest rates and economic activities. These interferences manifest themselves…

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Balance of Payments and Foreign Exchange

The balance of payments (BOP) is used to track transactions between a country and its international trading partners. It can be viewed as an accounting statement that captures all payments made to foreigners and liabilities incurred by them. BOP also…

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The Carry Trade

The uncovered interest rate parity suggests that with time, high-yielding currencies will depreciate while the low-yielding ones will appreciate. That is, if the uncovered interest rate parity holds consistently, an investor will earn a profit by taking a long position…

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Assessing the Long-run Fair Values of an Exchange Rate

The parity conditions are useful in the assessment of the fair value of currencies. Even then, it is worth clarifying that they cannot be used to gauge the currency value in real-time. As discussed previously, parity conditions include the covered…

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Future Exchange Rates and Parity Conditions

Uncovered Interest Rate Parity It states that the change in spot rate over the investment period should be averagely equal to the difference between the interest rates in two different countries. Put another way, the expected appreciation or depreciation should…

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The Relationship among International Parity Conditions

In the short run, most international parity conditions do not hold. However, over longer periods, they enjoy significant interaction among them courtesy of the interrelationship between interest rates, inflation rates, and exchange rates. Most notably: According to the ex-ante version…

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International Parity Conditions

International parity conditions refer to the economic theories that link exchange rates, price levels (inflation), and interest rates. These theories describe the interrelationships that help determine long-run fluctuations in exchange rates, interest rates, and inflation. Assumptions of International Parity Conditions…

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