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The Relationship between Exchange Rates and Interest Rate Differentials: a Wavelet Approach
Jönköping International Business School, Sweden.
Jönköping International Business School, Sweden.
Jönköping International Business School, Sweden.
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: KTH Royal Institute of Technology, 2010. , 23 p.
Series
CESIS Electronic Working Paper Series, 217
Keyword [en]
exchange rates, interest rate differential, uncovered interest parity, monetary approach, small-economy, wavelet analysis
National Category
Economics
Research subject
Economy, Economics
Identifiers
URN: urn:nbn:se:lnu:diva-41672OAI: oai:DiVA.org:lnu-41672DiVA: diva2:800268
Available from: 2015-04-02 Created: 2015-04-02 Last updated: 2017-04-19Bibliographically approved

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Karlsson, Hyunjoo Kim
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  • apa
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