<p>If by “greater”, you mean higher number It depends on how you quote exchange rate. Under American system the exchange rate between USD and euro would be given by <span class="math-container">$S=EUR/USD$</span> under European system the exchange rate would be quoted other way around as <span class="math-container">$S=USD/EUR$</span>. So under American system if the USD appreciates due to higher interest rates the <span class="math-container">$S$</span> would actually get lower while under the European system appreciation would actually lead to greater/higher exchange rate <span class="math-container">$S$</span>.</p>

<p>Otherwise, ceteris paribus, higher interest rate has to lead to appreciation under the standard exchange rate model since the exchange rate is given in standard monetary model of exchange rates:</p>

<p><span class="math-container">$$S=ln(p)-ln(p_f)= ln(m)-ln(m_f) -(ln(y)-ln(y_f))+\lambda(i-i_f) $$</span> (where <span class="math-container">$p$</span> is price level, <span class="math-container">$m$</span> money supply, <span class="math-container">$y$</span>, real GDP i interest rate and <span class="math-container">$f$</span> denotes foreign sector - also I assume that <span class="math-container">$ ln(L(i)) \approx \lambda i$</span>so the exchange rate should appreciate when interest rates <span class="math-container">$i$</span> increases and nothing else change. </p>

CC BY-SA 4.0
2020-01-08T01:02:41.963Z
2020-01-08T01:02:41.963Z
1muflon1
<p>If the central bank raises intereat rates, isn't the money supply now less and the exchange rate is greater? I have run into opposite statements and dont know how to approach this problem.
Thanks in advance for everyone's help</p>

CC BY-SA 4.0
2020-01-08T06:13:54.507Z
What do you mean when you say, "the exchange rate is greater"?
Art
CC BY-SA 4.0
2020-01-08T11:24:25.307Z
@Art that a unit of, say, dollars is now worth more pounds
segozcan
<macroeconomics><interest-rate><open-economy-macro><foreign-exchange>
How does exchange rate change with respect to interests?
segozcan
# How does exchange rate change with respect to interests?

(Asked by: username_0 on 2020-01-07)

If the central bank raises intereat rates, isn't the money supply now less and the exchange rate is greater? I have run into opposite statements and dont know how to approach this problem.
Thanks in advance for everyone's help

**Tags:** macroeconomics, interest-rate, open-economy-macro, foreign-exchange

> **Comments:**
> **username_1**: What do you mean when you say, "the exchange rate is greater"?  
> **username_0**: @username_1 that a unit of, say, dollars is now worth more pounds  

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## 1 answers

### Answer by username_2 on 2020-01-08. Score: 1

If by “greater”, you mean higher number It depends on how you quote exchange rate. Under American system the exchange rate between USD and euro would be given by $S=EUR/USD$ under European system the exchange rate would be quoted other way around as $S=USD/EUR$. So under American system if the USD appreciates due to higher interest rates the $S$ would actually get lower while under the European system appreciation would actually lead to greater/higher exchange rate $S$.

Otherwise, ceteris paribus, higher interest rate has to lead to appreciation under the standard exchange rate model since the exchange rate is given in standard monetary model of exchange rates:

$$S=ln(p)-ln(p\_f)= ln(m)-ln(m\_f) -(ln(y)-ln(y\_f))+\lambda(i-i\_f) $$ (where $p$ is price level, $m$ money supply, $y$, real GDP i interest rate and $f$ denotes foreign sector - also I assume that $ ln(L(i)) \approx \lambda i$so the exchange rate should appreciate when interest rates $i$ increases and nothing else change.


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