An investigation of the causal relations between exchange rates and interest rate differentials using wavelets

Abstract

Monthly and quarterly data for the spot exchange rate of the Swedish Krona against major currencies have been used in this paper to investigate the causality in a Granger sense at different time scales between the spot exchange rate and the nominal interest rate differential by using wavelet analysis. Impulse response functions are also utilized to examine the signs of how one of these variables affects the other over time. One key empirical finding from the causality tests is that there is only substantial evidence of a causal relationship in the long run between the two variables. When using monthly data, this is true in both directions. When considering impulse responses on how the interest rate differential affects the exchange rate, there appears to be some evidence of more negative relationships at the shorter time scales and more positive relationships at the longer time scales.

Do stock markets lead or lag macroeconomic variables? Evidence from select European countries

“…Whilst this literature offers comprehensive insights regarding the spillover effects between stock markets and the real economy, typical assumptions of theoretical models have led to dramatically different conclusions on various economic relationships (Hacker et al, 2014) and findings suggest that the actual connections between stock prices and macroeconomic variables could be fluid (Valcarcel, 2012). In addition, insights are at times contradictory due to the use of different proxies to model a given variable, and outcomes which may have been period-specific or country-specific.…”

Asymmetric causality between exchange rate and interest rate differentials: a test of international capital mobility

“…This paper differs from the prior studies in the following ways: unlike the recent study by Hacker, Karlsson and Månsson (2014), who employ a wavelets analysis and vector autoregressive (VAR) impulse response causality test in the context of Sweden, Choi and Park (2008), who study the causality in four Asian countries using VAR, and Dąbrowski, Papież and Śmiech (2015), who use country-specific bootstrap critical values and Wald test on panel Granger causality based on seemingly unrelated regression (SUR) in Central and Eastern European countries, the present study applies the bootstrap asymmetric causality method to distinguish between the existence of causality in good (exchange rate appreciation) and bad (exchange rate depreciation) times. The employed procedures work better when normality assumption is violated and in the presence of ARCH effect.…”

“…Some studies report bidirectional causality between interest and exchange rates. Such studies include Hacker, Karlsson and Månsson (2014), Paramati andGupta (2011), Srinivasan, Kalaivani andDevakumar (2014) and Kayhan, Bayat and Uğur (2013).…”

Retail City: The Relationship between Place Attractiveness and Accessibility to Shops

“…Size, as measured in terms of Population density, has a correlation with Access to shops in municipality of approximately 0.6 and a correlation with Access to shops in region of 0.7. As the variables of interest of the study, Access to shops in municipality and Access to shops in region (2012) and Hacker et al (2014). 18 After discriminating the linear relationship, we observe that the correlation between population density and access to shops in municipality as well as access to shops in region is naturally zero.…”