International Parity Conditions

International parity conditions are economic theories that relate to the relationships between exchange rates, interest rates, and inflation rates. Three important parity conditions are:

1. Interest Rate Parity: Interest rate parity states that the difference in interest rates between two countries is equal to the expected change in the exchange rate between their currencies.
2. Purchasing Power Parity: Purchasing power parity suggests that the exchange rate between two currencies should adjust to equalize the prices of identical goods in different countries.
3. International Fisher Effect: The international Fisher effect posits that differences in nominal interest rates between two countries are offset by changes in their expected inflation rates.