Co-determination of exchange rate and interest rate

This clip shows how interest rates -- determined in national financial markets -- and exchange rates -- determined in the foreign exchange market -- interact. When the central bank changes the interest rate, it affects the no-arbitrage condition in the foreign exchange market: Given a constant "fundamental" expected exchange rate, the current exchange rate depreciates (rises) following a decrease of the domestic interest rate. Vice versa, the current exchange rate appreciates (falls) following an increase in the domestic interest rate.

• #education
• #international
• #macroeconomics
• #macro
• #open
• #economy
• #intermediate
• #foreign
• #exchange
• #money
• #market
• #financial
• #interest
• #rate