On some parity conditions encountered frequently in international economics

Abstract

Interest Rate Parity, Purchasing Power Parity, and the Fisher relation between real and nominal interest are intimately connected consequences of optimal multi-period consumption/investment decisions. These three relations hold in their classic form only under complete certainty. With uncertainty, interest rate parity remains unaltered, but more complex equations involving risk premia obtain for purchasing power parity and the Fisher relation. A more complete market (with commodity futures) simplifies considerably these latter two conditions.

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