Nominal Exchange Rates and Nominal Interest Rate Differentials
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Summary:
This paper reexamines some unsettled theoretical and empirical issues regarding the relationship between nominal exchange rates and interest rate differentials and provides a model for the behavior of exchange rates in the long run, where interest rates are determined in the bond market. The model predicts that an increase in the interest rate differential appreciates the home currency. We test the model for the U.S. dollar against the Deutsche mark, the British pound, the Japanese yen, and the Canadian dollar. The first two pairs of exchange rates—for which purchasing power parity seems to hold—display a strong relationship with interest rate differentials.
Series:
Working Paper No. 1999/141
Subject:
Exchange rates Financial services Foreign exchange Long term interest rates Real exchange rates Real interest rates Short term interest rates
English
Publication Date:
October 1, 1999
ISBN/ISSN:
9781451856163/1018-5941
Stock No:
WPIEA1411999
Pages:
41
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