Explanation:

For the international Fisher effect to hold true, both the Fisher effect and real interest rate parity must hold.

International Fisher Effect: (i_foreign - i_domestic) = (E(S1) - S0)/S0

Required Conditions:

1. Fisher Effect: Nominal interest rate = Real interest rate + Expected inflation

   • i = r + π^e

2. Real Interest Rate Parity: Real interest rates are equal across countries

   • r_foreign = r_domestic

If both conditions hold:

• i_foreign - i_domestic = (r_foreign + π^e_foreign) - (r_domestic + π^e_domestic)
• Since r_foreign = r_domestic, this simplifies to: π^e_foreign - π^e_domestic
• This equals the expected exchange rate change under relative PPP

Therefore, both conditions are necessary for the international Fisher effect to be valid.