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Analysis of the asymmetric response of exchange rate to interest rate differentials: Evidence from the MINT countries

Author

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  • Dinci J. Penzin

    (Research Department, Central Bank of Nigeria)

  • Afees A. Salisu

    (Centre for Econometric & Allied Research, University of Ibadan)

Abstract

The asymmetric response of exchange rate to interest rate differential is empirically examined for the MINT countries. Consequently, we formulate a nonlinear autoregressive distributed lag model that accounts for asymmetries and structural breaks. We find that exchange rate responds asymmetrically to interest rate differential both in the long run and short run. Our results lend support to the sticky price hypothesis to justify the use of conventional policy tools for short run stabilisation. The same is established for the long run to drive in foreign investment flows. We argue contrarily for unconventional policies in Nigeria to correct short run fluctuations and to encourage long run investment flows given the positive relationship obtained in both time horizons.

Suggested Citation

  • Dinci J. Penzin & Afees A. Salisu, 2020. "Analysis of the asymmetric response of exchange rate to interest rate differentials: Evidence from the MINT countries," Economics Bulletin, AccessEcon, vol. 40(2), pages 938-943.
    • Handle: RePEc:ebl:ecbull:eb-20-00016
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    References listed on IDEAS

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    2. Salisu, Afees A. & Gupta, Rangan & Kim, Won Joong, 2022. "Exchange rate predictability with nine alternative models for BRICS countries," Journal of Macroeconomics, Elsevier, vol. 71(C).

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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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