Buy custom Exchange Rate Policy in Bangladesh: A Review of Key Concepts and Issues
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Business
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23 / 6199 |
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This relationship follows the uncovered interest rate parity condition: id = if + r + d , where d is expected rate of depreciation of the domestic currency.1 Under a fixed exchange rate system that is credible, d is zero and, if there is no country risk premium, id equals if . It is only when the exchange rate floats independently, the central bank gains control over monetary policy, in the sense that it can set the domestic currency interest rate irrespective of the foreign currency interest rate...
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It is only when the exchange rate floats independently, the central bank gains control over monetary policy, in the sense that it can set the domestic currency interest rate irrespective of the foreign currency interest rate. However, the above formula (the uncovered interest rate parity condition) suggests that, at equilibrium, the domestic currency interest rate would deviate from the foreign currency interest rate to the extent measured by r + d , where d can be approximated by the inflation differential between the home and foreign countries...
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