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What is the substance of the Purchasing Power parity concept? How is it affecting, if at all, the currency exchange markets?

A corollary to PPP is Interest Rate Parity (IRP) which holds that the domestic interest rate should converge to the foreign interest rate minus the expect appreciation of the domestic currency. Previously, we studied this concept in terms of the Expectations Theory of the interest rate term structure. What is the common thread between these two theories?

Basic Finance, Finance

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