Wavelet decomposition of relationship between real exchange rates and real interest differentials | | Posted on:2002-10-09 | Degree:Ph.D | Type:Dissertation | | University:University of Missouri - Columbia | Candidate:Kim, Jeong-Hwan | Full Text:PDF | | GTID:1469390011495279 | Subject:Economics | | Abstract/Summary: |  PDF Full Text Request | | This paper investigates the relationship between real exchange rates and real interest differentials. Admitting our ignorance of the underlying nature of the variables and the several timescales involved, we apply wavelet analysis to the time series of real exchange rates and real interest differentials. The maximal overlap discrete wavelet transform methodology is used to produce an additive decomposition of the variables into five time scale components and to perform the analysis of variance of each scale component.; This analysis indicates that the real exchange rate has little dynamics at low scales (high frequencies) and the greatest portion of its total variance is explained by the trend components. However, the real interest differential exhibits quite a lot of variability at low scales, with the biggest contribution to its total variance observed at the trend and lowest scale.; We also consider scale analysis of correlation and regression to investigate the relationship between real exchange rates and real interest differentials inherent reliance on the time horizon. We find that a positive relationship exists between these variables, with the strongest link occurring at the trend and business-cycle frequencies. In particular, at oscillations with a period length of more than 16 quarters, the real interest differential has the expected positive sign, is highly significant, and explains a substantial proportion of the total variation in the real exchange rate, with the extent of the relationship being generally stronger for the long-term interest differential. However, at lower scales the real interest differential effect declines dramatically and there does not appear to be any significant link between these variables. | | Keywords/Search Tags: | Real interest, Relationship between real exchange rates, Wavelet, Variables | | PDF Full Text Request | Related items |
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