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Theory of Interest Rate Parity

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PPGPortal > Home > Concept Dictionary > T, U, V > Theory of Interest Rate Parity
 
Theory of Interest Rate Parity

A theory of interest rate determination which holds that the real interest rate on comparable financial assets should be the same in all countries with full access to world financial markets.

(Dungan, Peter. Class Lecture.  PPG 1002H Microeconomics for Policy Analysis, University of Toronto School of Public Policy and Governance)

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In the real world, there does not exist perfect interest rate parity throughout the world. This is largely due to different levels of default risk that exist in different countries and the different tax laws and regulations which exist in different nations.
     
Theory of Interest Rate Parity

A theory of interest rate determination which holds that the real interest rate on comparable financial assets should be the same in all countries with full access to world financial markets.

(Dungan, Peter. Class Lecture.  PPG 1002H Microeconomics for Policy Analysis, University of Toronto School of Public Policy and Governance)

---------------------------------

In the real world, there does not exist perfect interest rate parity throughout the world. This is largely due to different levels of default risk that exist in different countries and the different tax laws and regulations which exist in different nations.

Approved for glossaryposting by Ben Eisen on January 28, 2011


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