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.
