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Identifying the determinants of exchange rate movements: Evaluating the real interest differential model
Jönköping University, Jönköping International Business School, JIBS, Economics.
2005 (English)Independent thesis Advanced level (degree of Magister), 10 points / 15 hpStudent thesis
Abstract [en]

Trying to find explanations to movements in the exchange rate is something that econo-mists have been dealing with to a great extend lately. Especially since the break down of the Bretton Wood system in the early 1970’s, when many countries introduced a floating sys-tem instead. One of the most famous and often tested models is Jeffery A. Frankel’s Real Interest Differential (RID) model from 1979.

This paper investigates which of the variables included in the model are affecting move-ments in the exchange rate for Sweden, the UK and Japan against the US dollar between January 1995 and December 2004. The variables in question are money supply, industrial production, interest rate and inflation differential. The model has purchasing power parity and uncovered interest parity as underlying theoretical assumptions, two main building blocks of open macro economics, and when combined, they can offer a relationship be-tween changes in the exchange rate and the interest rate differential.

The results show that the variable interest rate differential constitutes a significant explana-tory variable for exchange rate movements regarding all three countries included in the model. Both Sweden and the UK have also, in accordance with the RID model, the ex-pected negative sign on the coefficient. The results regarding the other variables are mixed between the countries, but it can in general be said that the model seems to be able to ex-plain movements in the exchange rate to a certain degree.

Place, publisher, year, edition, pages
2005. , p. 28
Keywords [en]
Exchange rate volatility, interest rate differential, money supply, inflation, industrial production
National Category
Economics and Business
Identifiers
URN: urn:nbn:se:hj:diva-247OAI: oai:DiVA.org:hj-247DiVA, id: diva2:3949
Uppsok
samhälle/juridik
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Available from: 2005-09-12 Created: 2005-09-12

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CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • harvard1
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf