In a fixed-exchange rate system with a high degree of capital mobility, if foreign exchange speculators' expectations of the long-run fundamental real value of the exchange rate increases and foreign interest rates increase,

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In a fixed-exchange rate system with high capital mobility, if speculators expect the real value of the domestic currency to increase and foreign interest rates rise, the domestic central bank would need to increase domestic interest rates. This action is necessary to prevent capital outflow (which would be attracted by higher foreign interest rates) and to maintain the fixed exchange rate by making domestic assets more attractive.

In a Fixed-Exchange Rate System with a High Degree of Capital