The IFE suggests that the percentage change in the exchange rate over the investment horizon will equal the interest rate differential between the two countries. ef = ih-if (textbook section 8-2d.) Implying that if ih>if or interest in home country is greater than interest in foreign country, then the exchange rate should go up. This contradicts what we discussed in chapter 4 and 6. If interest rates go up in the home country , then the home currency should appreciate and the foreign currency should depreciate.
How would you reconcile the two contradicting predictions?
