What is one of the implications of differential interest rates?

Differential interest rates can indeed enhance foreign capital inflows. When interest rates in one country are significantly higher than those in another, it attracts foreign investors seeking better returns on their investments. This influx occurs because investors are always looking for the most favorable conditions for earning interest or returns on their capital. Higher interest rates can signal a more profitable investment environment, motivating foreign capital to flow into that country to take advantage of the higher yields offered by local bonds, savings, or other investment vehicles.

This dynamic contributes to greater liquidity and can also stimulate domestic investment growth. As foreign capital enters the market, it can also strengthen the domestic currency in the short term due to increased demand for the currency necessary to make investments. In this context, the presence of differential interest rates very much supports the idea of a competitive investment atmosphere, encouraging capital movement across borders.

In contrast, while currency depreciation may occur in some scenarios, it is not a direct implication of differential interest rates. Similarly, the notion that only local investors would be attracted or that all investment opportunities would equalize does not accurately depict how differential interest rates operate in global finance.