An investigation of the causal relations between exchange rates and interest rate differentials using wavelets

R. Scott Hacker, Hyunjoo Kim Karlsson and Kristofer Månsson ()

International Review of Economics & Finance, 2014, vol. 29, issue C, 321-329

Abstract: 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.

Keywords: Exchange rate; Interest rate differential; Granger causality; Wavelet analysis; Uncovered interest rate parity (search for similar items in EconPapers)
JEL-codes: C32 E44 F31 F42 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

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Working Paper: An Investigation of the Causal Relations between Exchange Rates and Interest Rate Differentials Using Wavelets (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:29:y:2014:i:c:p:321-329

DOI: 10.1016/j.iref.2013.06.004

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