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Interest rate expectations and the exchange rate

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  • Ignacio Mauleón

Abstract

This paper presents a model of exchange rate reactions to interest rate changes and explains the following complex interactions. An expected interest rate increase induces a current depreciation. If that increase is true in the next period, then the exchange rate appreciates more than the previous depreciation. If the increase is sustained, it leads to a final, though small, depreciation. The model explicitly takes into account capital gains and losses. As far as expectations are concerned, two types of agents are considered (chartist and fundamentalist), and expectations are formed in two different ways (rational and bandwagon effect). Simulations and some empirical evidence for the U.S. dollar support the implications of the model. Copyright International Atlantic Economic Society 1998

Suggested Citation

  • Ignacio Mauleón, 1998. "Interest rate expectations and the exchange rate," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 4(2), pages 179-191, May.
    • Handle: RePEc:kap:iaecre:v:4:y:1998:i:2:p:179-191:10.1007/bf02295489
    DOI: 10.1007/BF02295489
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    Cited by:

    1. Mª Mar Sánchez, 2002. "Interest-Rate Models For Us And Uk With Mixed Inflationary Expectations. A Comparison With The Rational And The Adaptive Scheme," Working Papers. Serie AD 2002-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    2. Christina Anderl & Guglielmo Maria Caporale, 2021. "Testing for UIP: Nonlinearities, Monetary Announcements and Interest Rate Expectations," CESifo Working Paper Series 9027, CESifo.
    3. Ignacio Mauleón & Raul Larrion, 2003. "Growth and the current account: Malaysia and Singapore," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 9(2), pages 140-151, May.

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