Will international real interest differentials be larger

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Continuing with the preceding problem, we can de?ne short- and long-term real rates of interest. In all cases, the relevant real interest rate (annualized, that is, expressed in percent per year) is the annualized nominal interest rate at the maturity in question, less the annualized expected in?ation rate over the period of the loan. Recall the evidence that relative PPP seems to hold better over long horizons than short ones. In that case, will international real interest differentials be larger at short than at long maturities? Explain your reasoning.

Reference no: EM13868767

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