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The Relationship between Exchange Rate and Interest Rate Differentials: A Wavelet approach
Jönköping University, Jönköping International Business School, JIBS, Economics.
Jönköping University, Jönköping International Business School, JIBS, Economics.
Jönköping University, Jönköping International Business School, JIBS, Economics.
2010 (English)Report (Other academic)
Abstract [en]

This paper uses wavelet analysis to investigate the relationship between the spot exchange rate and the interest rate differential for seven pairs of countries, with a small country, Sweden, included in each of the cases. The key empirical results show that there tends to be a negative relationship between the spot exchange rate (domestic-currency price of foreign currency) and the nominal interest rate differential (approximately the domestic interest rate minus the foreign interest rate) at the shortest time scales, while a positive relationship is shown at the longest time scales. This indicates that among models of exchange rate determination using the asset approach, the sticky-price models are supported in the short-run while in the long-run the flexible-price models appear to better explain the sign of the relationship.

Place, publisher, year, edition, pages
Stockholm, Sweden: Centre of Excellence for Science and Innovation Studies, The Royal Institute of Technology , 2010. , p. 22
Series
CESIS Electronic Working Paper Series ; 217
Keywords [en]
exchange rates, interest rate differential, uncovered interest parity, monetary approach, small-economy, wavelet analysis
National Category
Economics
Identifiers
URN: urn:nbn:se:hj:diva-12140OAI: oai:DiVA.org:hj-12140DiVA, id: diva2:319212
Available from: 2010-05-15 Created: 2010-05-15 Last updated: 2010-05-18Bibliographically approved

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http://cesis.abe.kth.se/documents/CESISWP217.pdf

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Hacker, R ScottKim, HyunjooMånsson, Kristofer

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