Question

Define and give an example of the following in (a) and (b) below:

1. An example of a direct quote between the Australian dollar and the Mexican peso, where Australia is designated as the home country.
2. An example of an indirect quote between the Japanese yen and the Chinese renminbi (yuan), where China is designated as the home country.
3. Define the international Fisher effect. To what extent do empirical tests confirm that the international Fisher effect exists in practice?

Answer 1

a]

1 Mexican Peso = 0.077 AUD

b]

1 Yuan = 15.40 JPY

c]

According to the international Fisher effect, the appreciation/deprecation in the exchange rate between two countries is directly proportional to the difference in nominal interest rates between the two countries.

As per empirical tests, the international Fisher effect does not hold in the short-run. This is because of the various factors (other than nominal interest rates) that affect exchange rates. However, empirical tests have shown that the international Fisher effect does hold to some extent in the long-run.