Answer:
Open interest parity is a theory that states that the difference in interest rates between two countries should be equal to the expected change in the exchange rate between those two countries
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. In other words, it implies that the exchange rate between two countries should reflect the difference in interest rates between those countries.
For a medium-sized open economy under a flexible exchange rate regime, open interest parity implies that the country's monetary policy is not independent of international rates
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. This is because changes in the country's interest rates will affect the exchange rate, which in turn will affect the country's trade and financial flows. Therefore, the country's monetary policy must take into account the impact of international rates on the exchange rate and adjust its policy accordingly
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In summary, open interest parity implies that the exchange rate between two countries should reflect the difference in interest rates between those countries. For a medium-sized open economy under a flexible exchange rate regime, this means that the country's monetary policy is not independent of international rates and must take into account the impact of international rates on the exchange rate.