An Investigation of the Causal Relations between Exchange Rates and Interest Rate Differentials Using Wavelets
AbstractMonthly and quarterly data for the spot exchange rate of the Swedish Krona against major currencies have been used in this paper to investigate the causality in a Granger sense at different time scales between the spot exchange rate and the nominal interest rate differential by using wavelet analysis. 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 only substantial evidence of a causal relationship in the long run between the two variables. When using monthly data, this is true in both directions. 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 and more positive relationships at the longer time scales.
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Bibliographic InfoPaper provided by Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies in its series Working Paper Series in Economics and Institutions of Innovation with number 215.
Length: 20 pages
Date of creation: 11 Feb 2010
Date of revision:
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Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Phone: +46 8 790 95 63
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exchange rate; interest rate differential; Granger causality; wavelet analysis; uncovered interest rate parity;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-17 (All new papers)
- NEP-IFN-2010-04-17 (International Finance)
- NEP-MON-2010-04-17 (Monetary Economics)
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