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Analysis of the asymmetric response of exchange rate to interest rate differentials: Evidence from the MINT countries

Author

Listed:
  • Dinci J. Penzin

    (Research Department, Central Bank of Nigeria)

  • Afees A. Salisu

    (Centre for Econometric & Allied Research, University of Ibadan)

Abstract

The asymmetric response of exchange rate to interest rate differential is empirically examined for the MINT countries. Consequently, we formulate a nonlinear autoregressive distributed lag model that accounts for asymmetries and structural breaks. We find that exchange rate responds asymmetrically to interest rate differential both in the long run and short run. Our results lend support to the sticky price hypothesis to justify the use of conventional policy tools for short run stabilisation. The same is established for the long run to drive in foreign investment flows. We argue contrarily for unconventional policies in Nigeria to correct short run fluctuations and to encourage long run investment flows given the positive relationship obtained in both time horizons.

Suggested Citation

  • Dinci J. Penzin & Afees A. Salisu, 2020. "Analysis of the asymmetric response of exchange rate to interest rate differentials: Evidence from the MINT countries," Economics Bulletin, AccessEcon, vol. 40(2), pages 938-943.
    • Handle: RePEc:ebl:ecbull:eb-20-00016
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    References listed on IDEAS

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    1. Salisu, Afees A. & Ndako, Umar B., 2018. "Modelling stock price–exchange rate nexus in OECD countries: A new perspective," Economic Modelling, Elsevier, vol. 74(C), pages 105-123.
    2. Özmen, M. Utku & Yılmaz, Erdal, 2017. "Co-movement of exchange rates with interest rate differential, risk premium and FED policy in “fragile economies”," Emerging Markets Review, Elsevier, vol. 33(C), pages 173-188.
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    6. Umar Bida Ndako & Mobolaji Hakeem I., 2015. "Real Exchange Rates and Real Interest Rates Differential: Evidence from Nigeria," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 1(5), pages 65-75, 08-2015.
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    10. Peter Golit & Afees Salisu & Akinwunmi Akintola & Faustina Nsonwu & Itoro Umoren, 2019. "Exchange Rate And Interest Rate Differential In G7 Economies," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 22(3), pages 1-24.
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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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