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Interest rate parity and purchasing power parity

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Reference no: EM131095278

The Home country's real interest rate r is defined as r = R - πe where R is Home's nominal interest rate and  πe is Home's expected inflation rate. The Foreign real interest rate r* is defined as r* = R* - π*e where R* is the Foreign nominal interest rate and π*e is the expected inflation rate in Foreign. Show that if interest rate parity and purchasing power parity both hold between the two countries that the two countries real interest rates r and r* will be equal.

Reference no: EM131095278

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