Four way equivalence model

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

• Expectations theory
• Fisher Effect
• Interest rate parity
• International Fisher Effect
• Purchasing power parity