If IRP fails to hold,
A)pressure from arbitrageurs should bring exchange rates and interest rates back into line.
B)it may fail to hold due to transactions costs.
C)it may be due to government-imposed capital controls.
D)all of the options

Question

Quizplus · Accepted Answer

All of the options are potential reasons for the failure of the Interest Rate Parity (IRP) to hold. While pressure from arbitrageurs can help to correct deviations from the IRP, there may be cases where large transactions costs prevent this from happening effectively. Additionally, government-imposed capital controls can restrict the movement of capital and disrupt the relationship between exchange rates and interest rates.

If IRP Fails to Hold