Analysis of interest rate differentials and exchange rate between Colombia and the United States 2000-2013
DOI:
https://doi.org/10.18041/1900-0642/criteriolibre.2014v12n21.126Keywords:
Cointegration, Exchange rate, Inflation, Interest rate, Money supplyAbstract
This paper aims to analyze the influence of the money market interest rates differential on the peso-dollar exchange rate between Colombia and the United States in light of the model of Frankel (1979). For this purpose, in the first instance it is implemented a cointegration model that captures the purchasing power parity assumed in the abovementioned model. Then, the hypotheses of the interest rate differentials on the exchange rate are tested. The results show that there is evidence that purchasing power parity holds in the long run but not in the short term, and that the difference between the nominal interest rates between two countries, as well as the expected longterm inflation, well explain the movements of the nominal exchange rate.
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References
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Dowd J. y Enríquez, V. (2008). Modelo de la paridad de interés al descubierto en la determinación de la tasa de cambio en Chile, Brasil y México, 2003-2006. Ecos de Economía, 26, 7-40.
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Frankel, J. (1979). On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differential. The American Economic Review, 69, (4), 610-22.
Hooper, P. & Morton, J. (1982). Fluctuations in de Dollar: A Model of Nominal and Real Exchange Rate Determination. Journal of International Money and Finance, 1(1), 39-56.
Lopez, C.; Murray, C., & Papell, D. (2005). State of the Art Unit Root Tests and Purchasing Power Parity. Journal of Money, Credit and Banking, 37(2), 361-369.
Meese, R., and Rogoff, K. (1988). Was It Real? The Exchange Rate-Interest Differential Relation over the Modern Floating-Rate Period. The Journal of Finance, 43, 933-948.
Obstfeld, Maurice (1985). Floating Exchange Rates: Experience and Prospects. Brookings Papers on Economic Activity, (2), 369-464. Oliveros, H. y Huertas, C. (2003). Desequilibrios Nominales y Reales del Tipo de Cambio en Colombia. Ensayos Sobre Política Económica, (43), 32-65.
Paul, M. & Motlaleng, G. (2008). The Pula – Dollar Exchange Rate and the Purchasing Power Parity in Botswana. The Journal of Developing Areas, 41(2), 205-231.
Simmons, W., & Aggarwal, R. (2005). Purchasing Power Parity in the Eastern Caribbean Currency Union. The Journal of Developing Areas, 38(2), 155-169.
Smithin, J. (2002). Interest Parity, Purchasing Power Parity, “Risk Premia,” and Post Keynesian Economic Analysis. Journal of Post Keynesian Economics, 25(2), 219-235.
Toro, J. y Julio, J. M. (2005). Efectividad de la intervención discrecional del Banco de la República en el Mercado Cambiario. Borradores de Economía, 336, 1-23.
Dornbusch, Rudiger (1980). Exchange Rate Economics: Where Do We Stand? Brookings Papers on Economic Activity, 1, 143-205.
Dornbusch, Rudiger (1986). Flexible Exchange Rates and Excess Capital Mobility. Brookings Papers on Economic Activity, 1, 209-226.
Dornbusch, Rudiger (1976). Expectations and Exchange Rates Dynamics. The Journal of Political Economy, 84(6), 1161-1176.
Dowd J. y Enríquez, V. (2008). Modelo de la paridad de interés al descubierto en la determinación de la tasa de cambio en Chile, Brasil y México, 2003-2006. Ecos de Economía, 26, 7-40.
Echavarría, J.; Vásquez, D. y Villamizar, M. (2005). La tasa de cambio real en Colombia ¿Muy lejos del equilibrio? Ensayos Sobre Política Económica, 49, 134-191.
Frankel, J. (1979). On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differential. The American Economic Review, 69, (4), 610-22.
Hooper, P. & Morton, J. (1982). Fluctuations in de Dollar: A Model of Nominal and Real Exchange Rate Determination. Journal of International Money and Finance, 1(1), 39-56.
Lopez, C.; Murray, C., & Papell, D. (2005). State of the Art Unit Root Tests and Purchasing Power Parity. Journal of Money, Credit and Banking, 37(2), 361-369.
Meese, R., and Rogoff, K. (1988). Was It Real? The Exchange Rate-Interest Differential Relation over the Modern Floating-Rate Period. The Journal of Finance, 43, 933-948.
Obstfeld, Maurice (1985). Floating Exchange Rates: Experience and Prospects. Brookings Papers on Economic Activity, (2), 369-464. Oliveros, H. y Huertas, C. (2003). Desequilibrios Nominales y Reales del Tipo de Cambio en Colombia. Ensayos Sobre Política Económica, (43), 32-65.
Paul, M. & Motlaleng, G. (2008). The Pula – Dollar Exchange Rate and the Purchasing Power Parity in Botswana. The Journal of Developing Areas, 41(2), 205-231.
Simmons, W., & Aggarwal, R. (2005). Purchasing Power Parity in the Eastern Caribbean Currency Union. The Journal of Developing Areas, 38(2), 155-169.
Smithin, J. (2002). Interest Parity, Purchasing Power Parity, “Risk Premia,” and Post Keynesian Economic Analysis. Journal of Post Keynesian Economics, 25(2), 219-235.
Toro, J. y Julio, J. M. (2005). Efectividad de la intervención discrecional del Banco de la República en el Mercado Cambiario. Borradores de Economía, 336, 1-23.
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Published
2014-12-01
Issue
Section
Artículos
How to Cite
Astaiza Gómez, J. G., & Gómez Sánchez, A. M. (2014). Analysis of interest rate differentials and exchange rate between Colombia and the United States 2000-2013. Criterio Libre, 12(21), 157-182. https://doi.org/10.18041/1900-0642/criteriolibre.2014v12n21.126
