Abstract
An analysis of the economic reasons for international interest rate movements must start with the basic relationship between interest and inflation rates. Another key factor in today's environment of few capital controls, is investors' preference for maximizing yields on any of the prin- international capital flows are thus moving toward the high-yielding currencies, notably the dollar. The dollar's appreciation is, however, slo-wing correction of the U.S. balance of payments deficit. In conclusion, today's anti-inflation battle by the major central banks is causing capital movements and exchange rate shifts which may adversely affect balance of payments adjustment. cipal markets. International capital movements, dwarfing commercial transactions, have become the driving force of international interest rate linkage. But the economic environment is now changing in the principal countries. The U.S., Japan and the key European countries are tightening monetary policy to block inflationary pressures caused by the long period of rapid economic growth,
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