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An Investigation of the Causal Relations between Exchange Rates and Interest Rates Differentials using Wavelets
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]

Monthly and quarterly data for the spot exchange rate of the Swedish Krona against major currencies have been used in this paper to investigate the causality in a Granger sense at different time scales between the spot exchange rate and the nominal interest rate differential by using wavelet analysis. Impulse response functions are also utilized to examine the signs of how one of these variables affects the other over time. One key empirical finding from the causality tests is that there is only substantial evidence of a causal relationship in the long run between the two variables. When using monthly data, this is true in both directions. When considering impulse responses on how the interest rate differential affects the exchange rate, there appears to be some evidence of more negative relationships at the shorter time scales and more positive relationships at the longer time scales.

Place, publisher, year, edition, pages
Stockholm, Sweden: Centre of Excellence for Science and Innovation Studies, The Royal Institute of Technology , 2010. , 19 p.
Series
CESIS Electronic Working Paper Series, 215
Keyword [en]
exchange rate, interest rate differential, Granger causality, wavelet analysis, uncovered interest rate parity
National Category
Economics
Identifiers
URN: urn:nbn:se:hj:diva-12141OAI: oai:DiVA.org:hj-12141DiVA: diva2:319213
Available from: 2010-05-15 Created: 2010-05-15 Last updated: 2012-04-17

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