The international fisher effect (IFE) theory a major theory in international finance.
It is a theory specifying that a currency's exchange rate will depreciate against another currency when its interest rate (and therefore expected inflation rate) is higher than that of the other currency.
It uses interest rate rather than inflation rate differentials to explain why exchange rates change over time, but it is closely related to the PPP theory because interest rates are often highly correlated with inflation rates. According to the so-called fisher effect, nominal risk free interest rates contain a real rate of return and anticipated inflation. If investors of all countries require the same real of return, interest rate differentials between countries may be the result of differentials in expected inflation.