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So, according to my macroeconomics professor's notes, the UNCOVERED INTEREST RATE PARITY CONDITION is defined this way :

enter image description here

Now, i don't quite grasp the concept of the 'expected appreciation rate of the domestic currency'.

I was thinking that he meant maybe the 'expected depreciation of the domestic currency ' . Why am i saying this ?

Because if i go on the following slide , i see this : enter image description here

In accordance to this last slide, the implication would be that if the 'expected appreciation of the domestic currency' is positive, then the foreign interest rate (return) is higher than the domestic interest rate (return ) . This doesn't really make sense to me . It would make sense if we said that ' if the expected depreciation of the domestic currency is positive', then the foreign interest rate is higher than the domestic interest rate.

Indeed, if i go on another book of mine , this is what it says : It is not always convenient to buy domestic bonds when domestic interest rate is higher than the foreign interest rate . This is because, if the expected DEPRECIATION of the domestic currency exceeds the interest rate differential , then the return on foreign bonds will actually be higher .

So my question is, did my professor maybe mean that the domestic interest rate must be equal to the foriegn interest rate minus the expected depreciation rate of the domestic currency? If this is the case, then it would make sense to me . Obviously , if the domestic interest rate is higher than the foreign interest rate , BUT there are expectations that the domestic currency will decrease, then foriegn returns would actually be higher .

AM i correct?

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    $\begingroup$ How does your professor define $E_t$? Units of domestic currency per unit of foreign currency, or units of foreign currency per one unit of domestic currency? $\endgroup$ – Grada Gukovic May 8 at 20:39
  • $\begingroup$ There are already questions on interest rate parity economics.stackexchange.com/questions/14199/… $\endgroup$ – Brian Romanchuk May 8 at 23:30

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