5
$\begingroup$

This strategy (interest raise to minimize currency devaluation) is being adopted in countries like Brazil and Russia:

How does the interest rate rise protect the currency value?

I'm used to see news about governments raising the interest rate with the aim of protect the currency value. But I never saw an explanation about how these two things are related.

|improve this question
$\endgroup$
  • 1
    $\begingroup$ Would you mind clarifying the question and giving more explanation than just the links? $\endgroup$ – Mathematician Dec 16 '14 at 20:54
  • 1
    $\begingroup$ Good question, bad formatting and grammar. $\endgroup$ – Thorst Dec 17 '14 at 11:43
  • $\begingroup$ Hello @Soccerman, I accept suggestions / reviews. Despite I understand well English language, I'm still learning grammar. $\endgroup$ – cassioso Dec 17 '14 at 12:43
  • 1
    $\begingroup$ @cassioso Thanks! Would you mind meshing that explanation into the question itself? $\endgroup$ – Mathematician Dec 17 '14 at 15:59
  • 1
    $\begingroup$ @Mathematician done! $\endgroup$ – cassioso Dec 17 '14 at 19:06
5
$\begingroup$

An interest rate is the return that a lender earns on money lent to someone else. If the interest rate is higher then it makes lending money more attractive because the return is higher.

In particular, if the interest rate in, say, Russia increases relative to that in the USA then American lenders will switch from lending their money in America to lending their money in Russia where the return is greater. But in order to lend money in Russia, these investors are first going to have to convert their dollars into roubles. This increased demand for roubles causes the price of the rouble (i.e. the exchange rate) to increase.

|improve this answer
$\endgroup$
0
$\begingroup$

According to uncovered interest parity model, if you raise the domestic currency's bank deposit interest rate, then, ceteris paribus, the currency will appreciate. This can be shown mathematically.

|improve this answer
$\endgroup$
  • 1
    $\begingroup$ Why not adding some parts of that mathematical explanation? That would greatly improve your answer. $\endgroup$ – clem steredenn Oct 21 '16 at 6:03

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.