Nominal Exchange Rates and Nominal Interest Rate Differentials PDF Download

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Nominal Exchange Rates and Nominal Interest Rate Differentials

Nominal Exchange Rates and Nominal Interest Rate Differentials PDF Author: Mr.Francisco Nadal De Simone
Publisher: International Monetary Fund
ISBN: 1451856164
Category : Business & Economics
Languages : en
Pages : 42

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Book Description
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.