Interest rate parity can only hold if purchasing power parity holds.

Question

Quizplus · Accepted Answer

Interest rate parity and purchasing power parity are two separate concepts. While interest rate parity relates to the balance between expected returns on two different currencies, purchasing power parity relates to the exchange rate between two currencies and the relative costs of goods in each country. While the two can be related, they are not reliant on each other, and interest rate parity can hold even if purchasing power parity does not.

Interest Rate Parity Can Only Hold If Purchasing Power Parity