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Product Overview

This note reviews the four central parity conditions that underlie most theories regarding the relationship between exchange rates, inflation and interest rates. The concepts are illustrated through a unified example exploring the relation between the U.S. dollar and Norwegian krone. The note presents both an intuitive understanding of the relations as well as precise mathematical formulas frequently employed in analysis.

Learning Objectives

The learning objective is to familiarize students with the basic parity conditions and the underlying intuition that drives the relations. While the intuition is the focus of the note and the approximate relations (simple differences in rates, for example) are shown, the note also provides rigorous development of exact relations that allow sophisticated calculations.