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Financial Flows, Interest Rates and Exchange Rates

In: Global Finance and the Macroeconomy

Author

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  • A. J. Makin

    (University of Queensland)

Abstract

This chapter introduces a new economy-wide framework for interpreting international interest differentials. It is based on borrowing and lending behaviour in small economies whose domestic capital markets have become more integrated with global capital markets. Using extended loanable funds analysis, the framework reconciles the main financial relations that link domestic and foreign interest rate — the Fisher effect, purchasing power parity and uncovered interest parity. It also shows that the reaction of foreign lenders to factors influencing an economy’s creditworthiness is central to determining interest risk premia and how changing exchange rate expectations affect international interest differentials through borrowing and lending behaviour.

Suggested Citation

  • A. J. Makin, 2003. "Financial Flows, Interest Rates and Exchange Rates," Palgrave Macmillan Books, in: Global Finance and the Macroeconomy, chapter 5, pages 85-106, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-50403-5_5
    DOI: 10.1057/9780230504035_5
    as

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