The Exchange Rate and Interest Rate Differential Relationship: Evidence from Two Financial Crises

Kui-Wai Li () and Douglas Wong

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the contemporaneous and inter-temporal interaction between real exchange rate and real interest rate differential in the two financial crises of 1997 and 2008 by using data from thirteen countries from different world regions. The empirical result shows that negative contemporaneous relationship exists in most countries. In addition, there is little evidence on a systematic inter-temporal relationship between the real interest rate differential and the real exchange rate, and an absence of consistent result in supporting a negative relationship among the thirteen economies. An extremely low change in the conditional correlation between real interest rate differential and real exchange rates can be found in small countries.

Keywords: Contemporaneous; inter-temporal relationship; exchange rate; interest rate differential; financial crisis (search for similar items in EconPapers)
JEL-codes: C22 E43 F31 O57 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:35297

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