Question

What is the relationship of PPP and IFE, and explain some possible reasons for why they do not holds. (You can take example US and Canadian Currency)

Answer 1

PPP is related to IFE since expected differentials of inflation influence the nominal interest rates differentials. Between two economies.

However such relationships may not hold true between lets say Us dollars and Canadian dollars because of following :

• Income levels and government controls also influence the inflation differentials
• Excessive imports also do influence inflation differentials
• Inflation differentials can also be different due to natural disasters and calamity which can affect any one country and hence the difference.