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Nominal Exchange Rates and Nominal Interest Rate Differentials
Author:
Mr. Francisco d Nadal De Simone
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and
Weshah Razzak null

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Series:
IMF Working Papers
Volume/Issue:
Volume 1999: Issue 141
Language:
English
Publication Date:
01 Oct 1999
DOI:
https://doi.org/10.5089/9781451856163.001
ISBN:
9781451856163
ISSN:
1018-5941
Pages:
41
Keywords:
WP; exchange rate; Exchange rates; interest rate differential; bonds market; cointegration; common cycles; U.S. dollar; exchange rate-interest differential; interest rate differential CAD-USD; corresponding interest rate differential; nominal interest rate differential; differentials in the case; GBP-USD case; CAD-USD case; interest rate differential DM-USD; interest rate differential YEN-USD; differential CAD-USD; Real exchange rates; Real interest rates; Short term interest rates; Long term interest rates
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund