Effect of a depreciation on foreign interest rate? According to the interest rate parity condition , if there is a depreciation of the domestic exchange rate, then the domestic interest rate will increase and the foreign interest rate will decrease. Am i Correct?
According to the interest rate parity condition , if there is a depreciation of the domestic exchange rate, then the domestic interest rate will increase and the foreign interest rate will decrease. Am i Correct?


This verbal formulation does not match what interest rate parity states. Note that there are two versions of interest rate parity: covered interest rate parity (an arbitrage condition), and uncovered interest rate parity (an equilibrium condition that appears questionable).

See this question for a description of interest rate parity: link to question I will not repeat the description of interest rate parity, as it is done in that answer.

In both versions of interest rate parity, what matters is expected depreciation, not a historical event of depreciation.

The statement that interest rates adjust in reaction to expected exchange rate movements is also questionable. Short-term rates are largely under control of central banks in floating currencies, and so a more plausible description is that expected currency movements conform to interest rate differentials.