<p>An Interest Rate Differential (IRD) is the difference between two interest rates, typically the domestic interest rate and a foreign interest rate. It's a key concept in international finance and macroeconomics.</p>

<h2>How It Works</h2>
<p>The IRD is calculated by subtracting the foreign interest rate from the domestic interest rate:</p>
<p><strong>IRD = Domestic Interest Rate - Foreign Interest Rate</strong></p>
<p>For example, if the U.S. federal funds rate is 2% and the European Central Bank's rate is 0%, the IRD would be:</p>
<p><strong>IRD = 2% - 0% = 2%</strong></p>
<p>When the IRD is positive, the domestic currency is said to be at a premium. When it's negative, the domestic currency is at a discount.</p>

<h2>Why It Matters</h2>
<p>The IRD plays a crucial role in international capital flows and exchange rates. Here's why:</p>
<ul>
  <li><strong>Carry Trade:</strong> Investors can borrow in a low-interest-rate currency and invest in a high-interest-rate currency, profiting from the IRD.</li>
  <li><strong>Exchange Rate Impact:</strong> A positive IRD can lead to appreciation of the domestic currency, as investors seek higher yields. Conversely, a negative IRD can lead to depreciation.</li>
  <li><strong>Central Bank Policy:</strong> Central banks use IRD to guide monetary policy. A widening IRD might prompt intervention to stabilize the currency or adjust interest rates.</li>
</ul>