Long-term violations of the interest rate parity relationship may occur if imperfections in the international financial markets are allowed to exist.

Question

Quizplus · Accepted Answer

Imperfections in the international financial markets, such as capital controls, transaction costs, and information asymmetries, can create opportunities for arbitrage and hinder the efficient functioning of the interest rate parity relationship, leading to long-term violations.

Long-Term Violations of the Interest Rate Parity Relationship May Occur