Study the relationship between real exchange rate and interest rate differential – United States and Sweden

• Main Author: Wang, Zhiyuan
• Format: Others
• Language: English
• Published: Högskolan i Skövde, Institutionen för teknik och samhälle 2007
• Subjects: Exchange rate; interest rate differentials; unit root; co-integration; error correction model and forecast.; Economics; Nationalekonomi
• Online Access: http://urn.kb.se/resolve?urn=urn:nbn:se:his:diva-83

This paper uses co-integration method and error-correction model to re-examine the relationship between real exchange rate and expected interest rate differentials, including cumulated current account balance, over floating exchange rate periods. As indicated by the dynamic model, I find that there is a long run relationship among the variables using Johansen co-integration method. Final conclusion is that the empirical evidence is provided to show that our error-correction model leads to a good real exchange rate forecast.