The relationship between exchange rates and interest rates in a small open emerging economy: The case of Romania

Andrieş, Alin Marius; Căpraru, Bogdan; Ihnatov, Iulian; Tiwari, Aviral Kumar

doi:10.1016/j.econmod.2016.12.025

Cited by 37 publications

(14 citation statements)

References 41 publications

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“…Kim (2003) benefits from Johansen methodology and finds a positive long-run relationship between stock prices and output but a negative relationship between the real exchange rate, the interest rate and the inflation. Andries et al (2017) benefit from the wavelet based analysis for Romania and obtain a negative accordance in the short-run but this turns out to be positive in the long-run for the policy interest rate and the exchange rate. Narayan and Smyth (2006) detect a long-run relationship for China using the autoregressive distributed lag (ARDL) cointegration test for the real exchange rate, foreign exchange reserves and the real interest rate differential between China and the US.…”

Section: Literature Reviewmentioning

confidence: 99%

Loom of Symmetric Pass-Through

Şahin

2019

Economies

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This paper analyzes the effects of the real policy interest rate on the banking sector lending rate, the deposit rate, real stock prices, and the real exchange rate using the Engle Granger cointegration method (EG), the vector error-correction model (VECM), and the nonlinear vector error-correction model (NVECM) with monthly Turkish data over the period January 2002–April 2018. (1) EG results indicate bivariate cointegration relationships between the real interest rate, lending rates, and the deposit rate. The real interest rate increases all lending rates, mainly the housing rate. However, the long-run coefficient for the real exchange rate is not statistically significant. The pass-through is higher for the deposit rate than for lending rates. Moreoever, real stock prices shrink substantially where the finance sector has been affected the most. (2) VECM results indicate a cointegration relationship between all the variables except for the real exchange rate, which has a statistically non-significant pass-through coefficient. The real interest rate has a noteworthy long-run positive effect on the housing loans lending rate compared to others. The affirmative effect on real stock prices is the highest for the technology sector. The short-run effect of the real interest rate on lending rates, real stock prices and the real exchange rate are statistically non-significant except for the overall stock price index, and the vehicle loans lending rate which has a higher coefficient than the deposit rate. (3) NVECM results allow testing of eleven hypotheses and highlight the symmetric relationship and the valid pass-through effect, and reject the strong exogeneity assumption for all variables.

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Section: Literature Reviewmentioning

confidence: 99%

Loom of Symmetric Pass-Through

Şahin

2019

Economies

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“…The relationship between exchange rates and interest rates has been studied by Andries et al (2017).…”

Section: Diagram No 1 -Monetary Policy Transmission Mechanismmentioning

confidence: 99%

Romanian Interbank Interest Rates and Central Bank’s Monetary Policy

Verga

Vasilcovschi²

2019

SAEB

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Interbank rates are affected by the monetary policy of a country and represent a link to other financial and credit markets. In 2007, Romania became a member of the European Union and its central bank, the National Bank of Romania (NBR), joined the European System of Central Banks (ESCB) but not the Eurosystem. This paper analyses the role of the central bank and the use of its instruments concerning interbank rates. The research evaluates the influence of the Romanian Central Bank on interbank rates and shows that the policy rate and bank liquidity are among the main determinants of interbank rate movements. It is also presented that the NBR’s deposit and lending rates can limit the free movements of the interbank rate of interest. This research confirms that interbank interest rates influence bank rates strongly. The methodology used in this research includes cointegration, dynamic econometric measurement and analyses with Granger causality. Our research uses mainly ROBID and ROBOR of different maturities, showing that the influence of the Romanian Central Bank (NBR) on the interbank rate is strong, while the influence of the ECB and Fed is weak.

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“…Because developing or emerging countries have generally applied fixed of managed type of exchange rate regimes, the empirical exercises on the relationship between exchange rates and interest rates are fewer. Most recently, [15] examined the interactions between interest rates and exchange rates using wavelet-based methodologies for the case of Romania. It was revealed that the short-term relationship was negative in line with the sticky-price models, whereas the relationship was positive and confirmed the Purchasing Power Parity theory in the short term.…”

Section: Literature Reviewmentioning

confidence: 99%

“…It was revealed that the short-term relationship was negative in line with the sticky-price models, whereas the relationship was positive and confirmed the Purchasing Power Parity theory in the short term. Andrieș et al [15] exposed that the relationship between exchange rates and interest rate was fundamentally different in countries implementing a direct inflation targeting because their central banks had to pay simultaneous attention to both variables in order to achieve their monetary policy targets.…”

Section: Literature Reviewmentioning

confidence: 99%

Impacts of Exchange Rate Volatility on Macroeconomic and Financial Variables: Empirical Evidence from PVAR Modeling

Özçelebi¹

2018

Trade and Global Market

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In this study, Panel Vector Autoregression (PVAR) models are used to determine the impacts of exchange rate volatility on industrial production growth rate, consumer price inflation, short-term interest rates and stock returns for 10 OECD countries. The variance decompositions (VDCs) found that exchange rate volatility can be a secondary factor for the variations in immediate interest rates, implying that Uncovered Interest Rate Parity (UIP) condition should be analyzed by the inclusion of other macroeconomic variables. Impulse response functions (IRFs) expose that volatility in exchange rates can have a positive impact on the liquidity conditions in money market and an increase in real economic activity because investors have to move their money away from currency markets to money markets. The relatively lower impact of exchange rate volatility may arise from the zero bound problem, thus it is emphasized that the examination of impacts on exchange rate volatility on macroeconomics variables should be made both considering conventional and unconventional monetary policy. Although impulse response functions (IRFs) did not detect the significant impact of exchange rate volatility on inflation, VDCs obtained supporting results to exchange rate pass-through (ERPT). I suggest that the monetary policy to be developed should clarify alternative channels that exchange rate may affect inflation.

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The relationship between exchange rates and interest rates in a small open emerging economy: The case of Romania

Cited by 37 publications

References 41 publications

Loom of Symmetric Pass-Through

Loom of Symmetric Pass-Through

Romanian Interbank Interest Rates and Central Bank’s Monetary Policy

Impacts of Exchange Rate Volatility on Macroeconomic and Financial Variables: Empirical Evidence from PVAR Modeling

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