Here's the France-Germany long-term interest differential: You can see the surge from mid-2011 to mid-2012 mid-2012
In that case, seigniorage is equal to the interest differential times the stock of money.
Typically, the interest differential is defined the other way round (home minus foreign).
Notice that under sovereign money, the interest differential is simply i, because no interest is paid on money.
Lever that trade up ten times, and you are making 50% a year on the "carry," namely, the U.S.-Japan interest differential.
The Bank's ability to influence the exchange rate is limited the interest differential is also not the only determinant of rand strength.
The main source behind the credit surge and the subsequent withdrawal came from foreign short-term borrowing, as investors were exploiting the interest differential through carry-trade strategies.
With loan-deposit interest differential as one of the biggest sources of revenue for any banks, the nullification of the hypotheses that local customers would still prefer local banks poses serious questions.
In particular, we show that the sign and magnitude of the coefficient on the lagged interest differential is governed by a type of time-varying beta risk that reflects the conditional covariance between exchange rate returns and the return differential between foreign and domestic equities.
The results on the exchange rate models are in line with the literature and confirm the common finding of the failure of UIP: Uncovered interest parity predicts a coefficient of −1 on the interest differential, while in the data one usually finds insignificant or even positive values12.
