EXCHANGE RATE AND INTEREST RATE DIFFERENTIAL IN G7 ECONOMIES

  • Peter Golit Central Bank of Nigeria
  • Afees Salisu Centre for Econometric & Allied Research, University of Ibadan
  • Akinwunmi Akintola Central Bank of Nigeria
  • Faustina Nsonwu Central Bank of Nigeria
  • Itoro Umoren Central Bank of Nigeria
Keywords: G7 countries, asymmetry;, Structural break, Exchange rate, Interest rate differential

Abstract

We offer new insights on the dynamics of the exchange rate–interest rate differentialfor the case of G7 economies. We show that the nexus is better considered using anasymmetric model, as suggested by a host of previous studies. In addition, we find therole of accounting for structural breaks to be prominent. We also show differences in thenexus between euro and non-euro G7 countries, suggesting heterogeneous monetarypolicies. Thus, we document the strongest evidence for the sticky price hypothesis inJapan and lesser evidence in the euro countries and the United Kingdom, with Canadaconsistently revealing evidence for the flexible price hypothesis.

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Published
2019-10-28
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