1. What is the International Fisher Effect?

The International Fisher Effect (IFE) is an economic theory that states that the difference between two countries' nominal interest rates should equal the expected change in their exchange rate. It suggests that currencies with higher interest rates will depreciate relative to currencies with lower interest rates.

2. How Does the Calculator Work?

The calculator uses the International Fisher Effect formula:

Where:

• \( \Delta E \) — Change in Exchange Rate (%)
• \( r_d \) — Domestic Interest Rate (%)
• \( r_f \) — Foreign Interest Rate (%)

Explanation: The formula calculates the expected percentage change in the exchange rate between two currencies based on their interest rate differential.

3. Importance of Exchange Rate Prediction

Details: Accurate exchange rate prediction is crucial for international trade, foreign investment decisions, risk management, and monetary policy formulation. The International Fisher Effect provides a theoretical framework for understanding how interest rates influence currency values.

4. Using the Calculator

Tips: Enter domestic and foreign interest rates as percentages. Both values must be non-negative. The result shows the expected percentage change in the exchange rate.

5. Frequently Asked Questions (FAQ)

Q1: What assumptions does the International Fisher Effect make?
A: The IFE assumes that capital is mobile between countries, investors are rational, and there are no transaction costs or barriers to international investment.

Q2: How accurate is the International Fisher Effect in practice?
A: While the theory provides a useful framework, actual exchange rates are influenced by many other factors including inflation differentials, political stability, and market sentiment, so predictions may not always be perfectly accurate.

Q3: Does the IFE work for all currency pairs?
A: The effect tends to be more reliable for major currency pairs with high liquidity and similar economic characteristics.

Q4: How does inflation relate to the International Fisher Effect?
A: The IFE is closely related to the Fisher Effect, which states that real interest rates should be equal across countries, and nominal interest rate differentials reflect expected inflation differentials.

Q5: What time frame does the IFE prediction cover?
A: The IFE typically predicts exchange rate changes over the same time period as the interest rates used (e.g., annual rates predict annual exchange rate changes).