The real interest rate differential model is a variant of the above monetary model with a stronger focus on capital flows. It stipulates that the spot exchange rate tends to its equilibrium depending on the real interest rate differential. In recent years we have witnessed very high interest rates across the major economies. For many investors, currencies with high interest rates were attractive assets to buy, resulting in even higher exchanges rates for these appreciated currencies.

As with other models, the concept has its supporters and its detractors. Critics of the model argue that it focuses too much on capital flows and omits the nation's current account balance and other factors such as inflation, growth, etc. In any case, this model can be employed together with other models to determine the direction of the exchange rate move since its basic premises are quite logical.