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

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  • M. Utku Ozmen
  • Erdal Yilmaz

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.

Suggested Citation

  • M. Utku Ozmen & Erdal Yilmaz, 2016. "Co-movement of Exchange Rates with Interest Rate Differential, Risk Premium and FED Policy in �Fragile Economies�," Working Papers 1621, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:wpaper:1621
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    More about this item

    Keywords

    Exchange rate; FED policy; Uncertainty; Country risk; Fragile economies; Wavelet coherency;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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