The Interest Rate and Capital Flow Paradox
A developing country significantly increases its central bank interest rate, a move typically intended to attract foreign investment. However, in the weeks that follow, international investors begin to withdraw their capital on a large scale. Explain how shared beliefs among investors about the future value of the country's currency could cause this unexpected result.
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Economics
Economy
Introduction to Macroeconomics Course
Ch.7 Macroeconomic policy in the global economy - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
Social Science
Empirical Science
Science
Analysis in Bloom's Taxonomy
Cognitive Psychology
Psychology
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Investor Expectations and Capital Flows
Imagine a country, 'Econland,' whose government bonds have been popular with global investors. A major international financial news agency, trusted by most market participants, publishes a credible report forecasting a significant and imminent drop in the value of Econland's currency. Based on this information spreading through the investment community, what is the most likely immediate consequence for Econland?
The Self-Fulfilling Prophecy of Exchange Rate Expectations