Explain international Fisher effect
Explain and also derive international Fisher effect.
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International Fisher effect is achieved by joining the Fisher effect and also the comparative version of the PPP in its expectation form. Specifically, Fisher effect has
E(∏$) = I$ - ∏$,
E(∏£) = I£ - ∏£.
Assuming that rate of the real interest is same between the two countries, i.e., ∏$ = ∏£, and placing the above specified results in the PPP, i.e., E(e) = E(∏$)- E(∏£), we acquire the international Fisher effect: E(e) = I$ - I£.
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