This chapter discusses theories relating inflation, interest rates, and exchange rates. It covers the purchasing power parity (PPP) theory, which holds that inflation differentials between countries should be offset by exchange rate changes to maintain equal prices of similar goods. The chapter also examines the international Fisher effect (IFE) theory, which links interest rate differentials to expected inflation differentials and predicted exchange rate adjustments. Both theories are derived mathematically and their empirical validity is mixed. Factors like other influences on exchange rates and lack of goods substitutability can prevent PPP and IFE from holding precisely.