This paper analyses the nature of the interrelationship between interest rate and exchange rate. If on short time horizons the real interest rate, as theory predicts, affects the real exchange rate, on longer horizons the causality between these variables reverses. This is particularly true for emerging economies in which central banks attempt to control for the stability of exchange rates by accumulating foreign reserves. By employing Mexican data, we estimate a non-linear autoregressive distributed lags (NARDL) model to investigate the nature of the changes and the interaction between these two variables in response to monetary authorities’ actions. The results shows that, contrary to simplistic predictions, the real exchange rate causes the real interest rate in an asymmetric way.
The long-run interrelationship between exchange rate and interest rate: the case of Mexico
Capasso Salvatore;Napolitano Oreste;
2019-01-01
Abstract
This paper analyses the nature of the interrelationship between interest rate and exchange rate. If on short time horizons the real interest rate, as theory predicts, affects the real exchange rate, on longer horizons the causality between these variables reverses. This is particularly true for emerging economies in which central banks attempt to control for the stability of exchange rates by accumulating foreign reserves. By employing Mexican data, we estimate a non-linear autoregressive distributed lags (NARDL) model to investigate the nature of the changes and the interaction between these two variables in response to monetary authorities’ actions. The results shows that, contrary to simplistic predictions, the real exchange rate causes the real interest rate in an asymmetric way.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
