Deviations from interest rate parity could come from:

Question

Quizplus · Accepted Answer

All of the above options can cause deviations from interest rate parity. Transaction costs, such as fees for exchanging currency or for international transfers, can affect the relative value of different currencies and create differences in interest rates. Government controls and political risk can also affect the value of a currency and create deviations from interest rate parity. For example, if a government imposed capital controls that restricted foreign investment, it could create a difference between domestic and foreign interest rates. Similarly, political instability or uncertainty can create a risk premium that affects the value and interest-rate of a currency.

Deviations from Interest Rate Parity Could Come From