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An investigation of the causal relations between exchange rates and interest rate differentials using wavelets
Jönköping University, Jönköping International Business School, JIBS, Economics, Finance and Statistics.
Jönköping University, Jönköping International Business School, JIBS, Economics, Finance and Statistics.
Jönköping University, Jönköping International Business School, JIBS, Economics, Finance and Statistics.
2014 (English)In: International Review of Economics and Finance, ISSN 1059-0560, E-ISSN 1873-8036, Vol. 29, 321-329 p.Article in journal (Refereed) Published
Abstract [en]

This paper uses wavelet analysis to investigate causality between the spot exchange rate and the nominal interest rate differential for seven country pairs, which includes Sweden. 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 strengthening evidence of the nominal interest rate differential Granger causing the exchange rate as the wavelet time scale increases. 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 (i.e. an increase in the Swedish interest rate compared to that of another country is associated with a lower Swedish krona price of the other country's currency) and more positive relationships at the longer time scales.

Place, publisher, year, edition, pages
2014. Vol. 29, 321-329 p.
Keyword [en]
Exchange rate, Intererst rate differential, Granger causality, Wavelet analysis, Uncovered interest rate parity
National Category
Economics
Identifiers
URN: urn:nbn:se:hj:diva-21837DOI: 10.1016/j.iref.2013.06.004ISI: 000329597100022Scopus ID: 2-s2.0-84888291357OAI: oai:DiVA.org:hj-21837DiVA: diva2:643728
Available from: 2013-08-28 Created: 2013-08-28 Last updated: 2016-11-29Bibliographically approved
In thesis
1. Essays on Nonlinearities and Time Scales in Macroeconomics and Finance
Open this publication in new window or tab >>Essays on Nonlinearities and Time Scales in Macroeconomics and Finance
2014 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This thesis consists of four chapters concerning the topics of nonlinearities and time scales in economics. The focus is on market frictions and price rigidities that may cause nonlinearities and different relationships between economic variables over time. It also focuses on applying robust econometrical methods. Chapter two evaluates the size and power of some nonlinear tests for panel unit roots in the presence of cross-sectional dependency and spatial dependency. Based on the simulated results some robust tests for nonlinear panel unit roots have been found.

Chapter three applies robust linear and nonlinear tests for panel unit roots in order to investigate the purchasing power parity theory in developing regions. The main finding is that nonlinearities is an important phenomenon in the real effective exchange rates in developing regions and that support for several regions may be found by applying the nonlinear panel unit root test. Chapter four investigates if positive asymmetric price transmission (APT) exists in the Swedish mortgage loan market. Here robust quantile regression is used on data for the Swedish SEB bank. The main contribution is that positive APT effects are found, which implies that there is a higher propensity for the bank to rapidly increase its mortgage interest rates for customers following an increase in its borrowing costs, compared with the propensity for the bank to decrease its customers’ mortgage rates subsequent to a corresponding borrowing cost decrease.

Chapter five investigates the causal relations between exchange rates and interest rate differentials using wavelets. Also the sign of the relationship between the two variables is studied using impulse response functions. The data used is for seven country pairs in which Sweden is included in all of the different combinations. In this chapter one key empirical finding is that the causal relationship between the two variables becomes stronger as the time scale increases. The other key empirical finding is that more evidence of negative relationships is found at the shorter time scales and more positive relationships at the longer time scales.

Place, publisher, year, edition, pages
Jönköping: Jönköping International Business School, 2014. 124 p.
Series
JIBS Dissertation Series, ISSN 1403-0470 ; 095
National Category
Economics and Business
Identifiers
urn:nbn:se:hj:diva-23653 (URN)978-91-86345-50-1 (ISBN)
Public defence
2014-04-10, B1014 at JIBS, 10:00 (English)
Opponent
Supervisors
Available from: 2014-03-31 Created: 2014-03-27 Last updated: 2014-03-31Bibliographically approved

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Citation style
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