Four way equivalence model

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A model that proposes a number of related conceptual linkages between differences in:

(i) Interest rates;

(ii) Spot and forward foreign exchange rates;

(iii) Expected inflation rates; and

(iv) The expected change in spot foreign exchange rates.


The related individual linking theories are:

  1. Interest rate parity theory - linking interest rates & spot and forward foreign exchange rates.
  2. The Fisher Effect - linking interest rates with expected inflation rates.
  3. Expectations theory - forward foreign exchange rates and future out-turn spot foreign exchange rates.
  4. The International Fisher Effect - interest rate differentials and expected change in spot foreign exchange rates.
  5. Purchasing power parity theory - inflation rate differentials and expected change in spot foreign exchange rates.


See also