The Relationship between Exchange Rates and Interest Rate Differentials: a Wavelet Approach

R Scott Hacker, Hyunjoo Kim and Kristofer Månsson ()
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Hyunjoo Kim: Jonkoping International Business School

No 217, Working Paper Series in Economics and Institutions of Innovation from Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

Abstract: 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.

Keywords: exchange rates; interest rate differential; uncovered interest parity; monetary approach; small-economy; wavelet analysis (search for similar items in EconPapers)
JEL-codes: E44 F31 F42 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2010-02-11
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The Relationship between Exchange Rates and Interest Rate Differentials: A Wavelet Approach (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:cesisp:0217

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