Co-movement of Exchange Rates with Interest Rate Differential, Risk Premium and FED Policy in �Fragile Economies�

Utku Ozmen and Erdal Yılmaz ()

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: In this study, we use the wavelet coherency analysis in order to investigate the relationship between the exchange rate changes and its major financial determinants for selected emerging economies. Our analysis shows that the changes in exchange rate are correlated with interest rate differentials, risk premium, the FED�s monetary policy implementation and its policy uncertainty. Our findings reveal that the co-movement between the exchange rate changes and its financial determinants substantially changes across frequencies and over time: it becomes stronger/weaker or disappears completely at times. Also, although grouped together as �fragile economies�, the co-movement patterns of the exchange rate with major determinants vary to a large extent across these countries. Finally, the strongest co-movement of exchange rate changes is with the risk premium in all countries.

Keywords: Exchange rate; FED policy; Uncertainty; Country risk; Fragile economies; Wavelet coherency (search for similar items in EconPapers)
JEL-codes: E43 F31 F41 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1621

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