Explain and derive the international Fisher effect.
Answer: The international Fisher effect can be acquired by combining the Fisher effect and the relative version of purchasing power parity in its expectational form. Particularly, the Fisher effect holds that
E(p$) = I$ - r$,
E(p£) = I£ - r£.
Supposing that the real interest rate is similar between the two countries, that is r$ = r£, and substituting the above results into the PPP, that is E(e) = E(p$)- E(p£), we acquire the international Fisher effect: E(e) = I$ - I£.