Nominal Exchange Rates and Nominal Interest Rate Differentials

By Francisco d Nadal De Simone, Weshah Razzak

October 1, 1999

Preview Citation

Format: Chicago

Francisco d Nadal De Simone, and Weshah Razzak. Nominal Exchange Rates and Nominal Interest Rate Differentials, (USA: International Monetary Fund, 1999) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Subject: Exchange rates, Financial services, Foreign exchange, Long term interest rates, Real exchange rates, Real interest rates, Short term interest rates

Keywords: Bonds market, CAD-USD case, Cointegration, Common cycles, Corresponding interest rate differential, Differential CAD-USD, Differentials in the case, Exchange rate, Exchange rate-interest differential, Exchange rates, GBP-USD case, Interest rate differential, Interest rate differential CAD-USD, Interest rate differential DM-USD, Interest rate differential YEN-USD, Long term interest rates, Nominal interest rate differential, Real exchange rates, Real interest rates, Short term interest rates, U.S. dollar, WP

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1999/141
Stock No:

WPIEA1411999
ISBN:

9781451856163
ISSN:

1018-5941

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