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

• Carry trade
• Equivalence
• Expectations theory
• Fisher Effect
• Interest rate parity
• International Fisher Effect
• Model
• Purchasing power parity