relationship between IR and CAD? (1 Viewer)

[deviation]

I don't understand the connection between IR and CAD.

 

[pigs_can_fly]

interest rates don't directly affect the CAD. what they do affect is the capital and financial balance. if aust's IR is greater than that of overseas countries, then foreign capital will tend to flow into aust. this, however, carries with it servicing costs (eg. debt repayments, dividends) which will be recorded in the net income category in the current account balance, most likely as a deficit. if aust's IR is lower than the rest of the world, the opposite happens, and net income will tend to be in surplus. therefore, if the RBA raises IR in aust, the CAD will likely worsen, ceteris paribus. on the other hand, if the RBA lowers IR in aust, then the CAD will likely improve. of course, IR also has many other indirect effects on the economy, such as economic growth, and the level of investment, which could and do affect the CAD to some extent

 

[rukawasan]

ho! let us all heed the words of the true prophet... for he got bloody 100% in eco trials...

 

[sp0radic]

Increase in IR = Increase in ER = increase demand for Imports = worsening on BOGS = deterioration of CAD.

 

[pigs_can_fly]

one thing i forgot to mention was that the impact of IR on the exchange rate will also influence the demand and supply of exports and imports of goods and services, depending on their relative supply and demand elasticities