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Does interest rate parity imply that interest rates are the same in all countries? Why might...

Does interest rate parity imply that interest rates are the same in all countries? Why might purchasing power parity fail to hold?

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Answer #1

the given statement is true because interest rate parity means there would be a parity among the interest rate between the banks in two different countries because of various factors like exchange rates and inflation .

Interest rate parity plays an important factor in foreign currency market in deciding upon the spot exchange rate and the forward exchange rate.

purchasing power parity fails to hold because there would always be a presence of transaction cost into the economy and that would lead to purchasing power failure. This is because arbitraging would not be taking place where the transaction cost is higher than the profits from arbitrage.

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