Effects of Potential GDP Growth Rate on Equity and Fixed Income
GDP is important because it controls inflation’s effects on an economy. If the real GDP growth is higher (lower) than the potential growth rate, the inflation rate will increase (decrease), affecting the nominal rates and bond prices. Moreover, potential GDP…
Relationship between Long-run Rate of Stock Market Appreciation and Sustainable Growth Rate
Potential economic growth is vital to investors. Potential GDP is used to measure the productive capacity of an economy. Investors are always curious to know if earnings growth is attributable to the GDP growth rate. Equally, they are keen on…
Economic Growth in the Developed and Developing Economies
Economic growth is the increase in the production of goods and services of a country, compared to one time and another. GDP and per capita GDP are common indicators economists employ in the measuring the standard of living and the…
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…
Exchange Rate Intervention and Controls
A country’s capital flows can be advantageous 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 should not…
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…
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 themselves courtesy of the interrelationship between interest rates, inflation rates, and exchange rates. Most notably: According to the ex-ante version…
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…
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…
Assessing the Long-run Fair Values of an Exchange Rate
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…
