Exchange Rate Behavior with Exchange Rate Behavior with Exchange Rate Behavior with Exchange Rate Behavior with
Negative Interest Rates:Negative Interest Rates:Negative Interest Rates:Negative Interest Rates:
Some Early Negative Some Early Negative Some Early Negative Some Early Negative
ObservationsObservationsObservationsObservations
Andrew K. Rose
Berkeley-Haas, ABFER, CEPR and NBER
(joint work with Allaudeen Hameed)
MotivationMotivationMotivationMotivation
• In last decade, five economies experienced (non-trivial) negative nominal interest rates
• Denmark, EMU, Japan, Sweden, Switzerland
• Most focus on consequences of Negative Interest Rate Policy (NIRP):• Growth, inflation
• Bank profitability, micro-structural effects
• Financial Stability
• Here, focus on exchange rate behavior
• Volatility, Uncovered Interest Parity Deviations (UIP)
• Literature: little work, no strong results
Negative Nominal Interest Rates and Exchange Rates 2
Summary of FindingsSummary of FindingsSummary of FindingsSummary of Findings
• Negative Nominal Interest Rates have almost no observable consequences for exchange rate behavior
• Exchange Rate Volatility
• Deviations from Uncovered Interest Parity
• Carry Trade Returns
Negative Nominal Interest Rates and Exchange Rates 3
Data SetData SetData SetData Set
• Time span short, hence maximize scope of necessarily limited data set• Include 61 currencies/economies “countries”
• Begin January 2010 (post GFC), continue through May 2016
• Daily (highest frequency with many countries)
• Switzerland usually base• First negative nominal rates; longest span of time; most negative rates
• Sensitivity with US$, GBP, Euro as alternatives
Negative Nominal Interest Rates and Exchange Rates 4
Country ListCountry ListCountry ListCountry ListArgentina Australia1 Bahrain3
Brazil Botswana4 Bulgaria3
Canada1 Chile China2,4
Colombia Croatia4 Czech. Rep.1,4
Denmark1,3 Egypt4 EMU1
Estonia1,3 Ghana Hong Kong1,2,3
Hungary Iceland1 India2
Indonesia2 Israel1 Japan1,2
Jordan3 Kazakhstan2,4 Kenya
Korea1,2 Kuwait3 Latvia1,3
Lithuania1,3 Malaysia2 Mexico
Morocco3 Norway1 New Zealand1
Oman3 Pakistan2 Peru
Philippines2 Poland Qatar3
Romania Russia Saudi Arabia3
Serbia Singapore1,2 South Africa
Sri Lanka2 Sweden1 Switzerland
Taiwan1,2 Thailand2 Tunisia4
Turkey2 Uganda UK1
United Arab Rep.3 USA1 Vietnam2,4
Zambia
Negative Nominal Interest Rates and Exchange Rates 5
First LookFirst LookFirst LookFirst Look
• Swiss interest rates go negative briefly in August 2011• Follows sudden Swiss Franc appreciation
• SNB diagnoses “massive overvaluation”, loosens to protect competitiveness, reduce deflationary pressure
• September 2011: SNB places floor on Euro/Swiss Franc exchange rate
• January 2015: exchange rate constraint removed, jump appreciation, NIRP begins in earnest
Negative Nominal Interest Rates and Exchange Rates 6
Swiss Interest and Effective Exchange RatesSwiss Interest and Effective Exchange RatesSwiss Interest and Effective Exchange RatesSwiss Interest and Effective Exchange Rates
Interest Exchange
12
014
016
018
0
-1-.
50
.5
01 Jan 10 01 Jan 12 01 Jan 14 01 Jan 16
Exc
ha
ng
e R
ate
Inte
rest R
ate
LIBOR 1-month interest rate; EER index from Bank of England; 1990=100
Swiss Interest and Effective Exchange Rates
Negative Nominal Interest Rates and Exchange Rates 7
Bilateral (Swiss) Exchange RatesBilateral (Swiss) Exchange RatesBilateral (Swiss) Exchange RatesBilateral (Swiss) Exchange Ratesand National Interest Ratesand National Interest Ratesand National Interest Ratesand National Interest Rates
Interest Exchange
8/2011 1/2015 .81
1.2
1.4
.1.2
.3.4
.5
01 Jan 10 01 Jan 12 01 Jan 14 01 Jan 16
US$/C
HF
America
n intere
st
United States
Interest
Exchange
8/2011 1/2015
.7.8
.91
-.5
0.5
11.5
01 Jan 10 01 Jan 12 01 Jan 14 01 Jan 16
Euro
/CHF
Euro
intere
st
EMU
Interest
Exchange
8/2011 1/2015 80
100
120
140
-.1
-.05
0.05
.1.15
01 Jan 10 01 Jan 12 01 Jan 14 01 Jan 16
Yen/C
HF
Japanese
intere
st
Japan
Interest
Exchange
8/2011 1/2015 .6.65
.7.75
.8.85
.5.6
.7.8
01 Jan 10 01 Jan 12 01 Jan 14 01 Jan 16
GBP/C
HF
British
intere
st
United Kingdom
Swiss Exchange and National Interest Rates
Negative Nominal Interest Rates and Exchange Rates 8
Little Linkage Between EER VolatilityLittle Linkage Between EER VolatilityLittle Linkage Between EER VolatilityLittle Linkage Between EER Volatilityand Interest Rate Leveland Interest Rate Leveland Interest Rate Leveland Interest Rate Level
• Measure volatility as standard deviation (over month) of first-differences of natural logarithms
• No relationship between exchange rate volatility and interest rate level
• Even for negative nominal interest rates!
Negative Nominal Interest Rates and Exchange Rates 9
Effective Exchange Rate VolatilityEffective Exchange Rate VolatilityEffective Exchange Rate VolatilityEffective Exchange Rate Volatilityand Interest Rates: Switzerlandand Interest Rates: Switzerlandand Interest Rates: Switzerlandand Interest Rates: Switzerland
8/2011
9/2011
1/2015Slope=-.18 (.15)
01
23
4E
xch
ang
e r
ate
vo
latil
ity
-1 -.5 0 .5Interest rate
Standard deviation of change in daily log effective exchange rate (%); 30-day annualized interest rate
Monthly observations
Switzerland
Negative Nominal Interest Rates and Exchange Rates 10
Also True of Other CurrenciesAlso True of Other CurrenciesAlso True of Other CurrenciesAlso True of Other Currencies
• US $, Euro, Yen, Pound Sterling, Danish Krone, Swedish Krone• 4 more currencies with NIRP
• Still no strong linkage between exchange rate volatility and interest rate level
• Some signs of positive linkage
• Nothing unusual when nominal interest rate becomes negative!
Negative Nominal Interest Rates and Exchange Rates 11
Effective Exchange Rate VolatilityEffective Exchange Rate VolatilityEffective Exchange Rate VolatilityEffective Exchange Rate Volatilityand Interest Rates: Othersand Interest Rates: Othersand Interest Rates: Othersand Interest Rates: Others
Slope=.62 (.18)
0.4
.81.2
Exchange rate volatility
-.5 0 .5 1 1.5 2 2.5
United States
Slope=.08 (.03)
0.4
.81.2
-.5 0 .5 1 1.5 2 2.5
EMU
Slope=-.01 (.01)
0.4
.81.2
-.5 0 .5 1 1.5 2 2.5
Denmark
Slope=.80 (.51)
0.4
.81.2
Exchange rate volatility
-.5 0 .5 1 1.5 2 2.5Interest rate
Japan
Slope=.02 (.17)
0.4
.81.2
-.5 0 .5 1 1.5 2 2.5Interest rate
United Kingdom
Slope=.03 (.01)
0.4
.81.2
-.5 0 .5 1 1.5 2 2.5Interest rate
Sweden
Standard deviation of change in daily log effective exchange rate (%); 30-day annualized interest rate
Monthly observations
Exchange Rate Volatility and Interest Rates
Negative Nominal Interest Rates and Exchange Rates 12
Econometric VerificationEconometric VerificationEconometric VerificationEconometric Verification
• Regress effective exchange rate volatility against interest rate level and dummy for NIRP
• 11 economies with effective rates (Australia, Canada, Denmark, Euro, Japan, New Zealand, Norway, Sweden, Switzerland, UK, and USA)
• 5 have NIRP (Denmark, Euro, Japan, Sweden, Switzerland)
• Include country-specific FE
• σ(effi,τ) = α + βinterest,τ + γNegDummyi,τ + ξi,τ
• NegDummyi,τ is 1 if i has negative nominal interest rate at time τ, 0 ow
Negative Nominal Interest Rates and Exchange Rates 13
Regressions of Effective Regressions of Effective Regressions of Effective Regressions of Effective Exchange Rate Exchange Rate Exchange Rate Exchange Rate Volatility on Interest Volatility on Interest Volatility on Interest Volatility on Interest RatesRatesRatesRates
Interest Rate
Level
Dummy,
Negative
Interest Rate
Obs.
Default .90
(1.52)
1.22
(2.78)
869
Negative Nominal Interest Rates and Exchange Rates 14
Sensitivity AnalysisSensitivity AnalysisSensitivity AnalysisSensitivity AnalysisInterest Rate
Level
Dummy, Negative
Interest Rate
Observations
Add Time
FE
-2.48
(1.50)
-4.81
(2.52)
869
Without Country
FE
4.54**
(.58)
-12.9**
(3.1)
869
Official (not market)
interest rates
2.70
(1.62)
7.35*
(3.01)
869
2011 .38
(10.9)
n/a 132
2012 9.62**
(3.19)
7.04
(4.37)
143
2013 -15.7
(16.7)
3.12
(7.42)
132
2014 -.70
(5.52)
-2.91
(5.66)
143
2015 -11.84
(15.53)
-9.17
(23.29)
132
Without
Fixers
-.88
(1.63)
.39
(3.34)
790
Only lowest half
by interest rate
-10.75
(7.16)
-2.54
(4.40)
435
Without > |2σ|
Outliers
.56
(1.08)
1.53
(1.92)
844
Negative Nominal Interest Rates and Exchange Rates 15
True in Bilateral Rates too …True in Bilateral Rates too …True in Bilateral Rates too …True in Bilateral Rates too …
• Russia only exception to insignificant slope• But minimal Russia interest rate >3% (average >7%)
• No sign that negative nominal rates matter
Negative Nominal Interest Rates and Exchange Rates 16
Bilateral Exchange Rate VolatilityBilateral Exchange Rate VolatilityBilateral Exchange Rate VolatilityBilateral Exchange Rate Volatilityand Interest Ratesand Interest Ratesand Interest Ratesand Interest Rates
1/2015
01
23
Volatility
2 3 4 5 6
Australia1/2015
01
23
2 4 6 8
China1/2015
01
23
4 6 8 10
India
1/2015
01
23
Volatility
4 5 6 7 8
Indonesia1/2015
01
23
1.5 2 2.5 3 3.5
Korea1/2015
01
23
6 8 10 12 14
Pakistan
1/2015
12/2014
02
46
Volatility
5 10 15 20National interest rate
Russia1/2015
01
23
.4 .5 .6 .7 .8National interest rate
Taiwan
1/2015
012
34
4 6 8 10 12National interest rate
Turkey
Standard deviation of change in daily log bilateral Swiss exchange rate (%); 30-day annualized interest rate
Monthly observations
Bilateral Exchange Rate Volatility and Interest Rates
Negative Nominal Interest Rates and Exchange Rates 17
Quick SummaryQuick SummaryQuick SummaryQuick Summary
• Little evidence that negative nominal interest rates have affected exchange rate volatility
• But NIRP sometimes prompted by concerns about level of exchange rate (Denmark, Switzerland)
• Now move from second- to first-moment of exchange rate
Negative Nominal Interest Rates and Exchange Rates 18
Uncovered Interest ParityUncovered Interest ParityUncovered Interest ParityUncovered Interest Parity
• Well-known: UIP fails badly in literature• Often ex post changes in exchange rates negatively correlated with forward
premium!
• Does the UIP relationship change in the presence of negative nominal interest rates?
• Essentially compare ex post one-month change in bilateral Swiss exchange rate to forward premium
Negative Nominal Interest Rates and Exchange Rates 19
What Does the Data Say?What Does the Data Say?What Does the Data Say?What Does the Data Say?
• Pooling entails much dependency across • Time (prediction horizon > data frequency) – handle with monthly data
• Countries (cross-sectional dependency) – handle with care!
• Little sign of any strong positive relationship• But slope is positive, both for a) whole sample; b) observations with one
negative interest rate (half of sample)
Negative Nominal Interest Rates and Exchange Rates 20
Monthly Exchange Rate ChangesMonthly Exchange Rate ChangesMonthly Exchange Rate ChangesMonthly Exchange Rate Changesand Forward Premiaand Forward Premiaand Forward Premiaand Forward Premia
Slope=.39 (.18)
-30
-15
015
30
Exc
hange R
ate C
hange
0 2 4 6 8 10
Whole Sample (4492 obs)
Slope=.56 (.19)
-30
-15
015
30
0 2 4 6 8 10
One Negative Interest Rate (2084 obs)
Slope=-.10 (.23)
-30
-15
015
30
Exc
hange R
ate C
hange
0 2 4 6 8 10Forward Premium
Positive Interest Rates (2354 obs)
Slope=31 (18)
-2-1
01
2
.02 .04 .06 .08 .1Forward Premium
Two Negative Interest Rates (15 obs)
60 currencies/Swiss Franc, 1/2010-5/2016, without Argentina 11/2015
Monthly Observations
One-Month Exchange Rate Change and Forward Premia
Negative Nominal Interest Rates and Exchange Rates 21
Positive Results Warrant Further InvestigationPositive Results Warrant Further InvestigationPositive Results Warrant Further InvestigationPositive Results Warrant Further Investigation
• Zoom into periods of different Swiss interest rates• Histogram suggests: a) periods of very negative rates; and b) periods ≈ 0
• Swiss interest rates very negative(<-.5%): no relationship
• Swiss interest rates tiny positive (<.1%): no relationship
• Swiss interest rates tiny negative (>-.1%): positive relationship• Statistically significant but poor fit, few observations
• Statistically different slope as interest rates positive/negative
Negative Nominal Interest Rates and Exchange Rates 22
Monthly Exchange Rate ChangesMonthly Exchange Rate ChangesMonthly Exchange Rate ChangesMonthly Exchange Rate Changesand Forward Premia: Zooming Inand Forward Premia: Zooming Inand Forward Premia: Zooming Inand Forward Premia: Zooming In
05
10
15
20
25
Density
-1 -.75 -.5 -.25 0 .25Swiss Interest Rate
Histogram
Slope=.08 (.22)
-.2-.1
0.1
.2.3
Exc
hange rate change
0 .02 .04 .06 .08 .1Forward premium
Swiss interest (0,.1%)
Tiny Positive Interest
Slope=.43 (.25)-.3-.15
0.15
.3
Exc
hange rate change
0 .02 .04 .06 .08Forward premium
Swiss interest <-.5%
Negative Interest Rate
Slope=.93 (.20)
-.2-.1
0.1
.2.3
Exc
hange rate change
0 .02 .04 .06 .08 .1Forward premium
Swiss interest (-.1%,0)
Tiny Negative Interest
Monthly observations for 60 currencies/Swiss Franc, 1/2010-5/2016, without Argentina 11/2015
One-Month Exchange Rate Changes and Forward Premia
Exchange Rates during Small/Negative Interest Rates
Negative Nominal Interest Rates and Exchange Rates 23
Even More Investigation …Even More Investigation …Even More Investigation …Even More Investigation …
• Switch to Euro; many more observations with interest rates close to zero (both positive and negative)
• Euro interest rates miniscule positive (<.05%): negative relationship
• Euro interest rates miniscule negative (>-.05%): no relationship• Quite different from Swiss Franc (none/significantly positive)
• Statistical analogue to come
Negative Nominal Interest Rates and Exchange Rates 24
Monthly Exchange Rate ChangesMonthly Exchange Rate ChangesMonthly Exchange Rate ChangesMonthly Exchange Rate Changesand Forward Premia: Zooming Into the Euroand Forward Premia: Zooming Into the Euroand Forward Premia: Zooming Into the Euroand Forward Premia: Zooming Into the Euro
Slope=.17 (.87)
-.3
0.3
-.025 0 .025 .05 .075 .1
Euro interest >=1.25%, 236 Obs
Positive
Slope=-.13 (.01)
-.2
-.1
0.1
.2
Exc
hange R
ate C
hange
0 .03 .06 .09
Euro interest [0,.05%], 231 Obs
Miniscule Positive
Slope=-.69 (1.16)
-.3
0.3
-.025 0 .025 .05 .075 .1Forward premium
Euro interest <=-.25%, 114 Obs
Negative
Slope=.35 (.19)
-.2
-.1
0.1
.2
Exc
hange R
ate C
hange
0 .03 .06 .09Forward premium
Euro interest [-.05%,0), 171 Obs
Miniscule Negative
Monthly observations for 60 currencies/Euro, without Argentina 11/2015
One-Month Exchange Rate Change and Forward Premia
Exchange Rates with Similar/Dissimilar Interest Rates
Negative Nominal Interest Rates and Exchange Rates 25
Testing UIPTesting UIPTesting UIPTesting UIP
Estimate:
log(si,t+21)-log(si,t) = α + β[log(fi,t+21,t)-log(si,t)] + γOnei,t + δBothi,t + εi,t+21,t
Notes:
• No risk premium, rational expectations, large sample: α=0, β=1, γ=δ=0
• Much of literature has β<1 (often negative)
• MA errors, so use Newey-West standard errors
Negative Nominal Interest Rates and Exchange Rates 26
Fama Regressions: NIRP as interceptFama Regressions: NIRP as interceptFama Regressions: NIRP as interceptFama Regressions: NIRP as intercept
Slope Intercept One Negative
Interest Rate
Two Negative
Interest Rates
Observations
Prevalence 50% 49% 1% 93,937
Common
Intercept
.59**
(.12)
.16**
(.06)
93,937
Default .58**
(.13)
.13*
(.07)
.07
(.08)
-.57**
(.16)
93,937
Country
FE
.61**
(.16)
n/a .10
(.08)
-.87**
(.20)
93,937
Negative Nominal Interest Rates and Exchange Rates 27
ResultsResultsResultsResults
• UIP works poorly: easily reject α=0, β=1• Doesn’t change with NIRP dummies
• Results robust to robustness checks
• But UIP works better than usual (β>0)
• Can also check if slopes vary by NIRP (multiplicative, not additive)
Negative Nominal Interest Rates and Exchange Rates 28
Testing for Slope Testing for Slope Testing for Slope Testing for Slope DiscontinuityDiscontinuityDiscontinuityDiscontinuityof of of of Fama Fama Fama Fama RegressionRegressionRegressionRegression
Size of Euro
Interest rate
Euro Interest Rate Equality Test
(p-value)
Observations
Positive Negative
In +/- .05% .25 (.32) -.19 (.20) 1.5 (.22) 9,526
In +/- .10% .76 (.45) -.23 (.16) 1.3 (.25) 37,742
In +/- .15% .42 (.27) .27 (.16) .3 (.62) 42,919
In +/- .20% .77 (.11) .37 (.17) 4.2* (.04) 47,188
In +/- .25% .75 (.11) .47 (.17) 2.0 (.16) 54,689
Negative Nominal Interest Rates and Exchange Rates 29
Another Approach: Carry Trade ReturnsAnother Approach: Carry Trade ReturnsAnother Approach: Carry Trade ReturnsAnother Approach: Carry Trade Returns
• Carry trade relies on UIP deviations
• Consensus in literature of positive but risky returns (Burnside et al)
• We ask “Do carry trade returns vary with negative nominal interest rates?”
Negative Nominal Interest Rates and Exchange Rates 30
Constructing Carry Trade ReturnsConstructing Carry Trade ReturnsConstructing Carry Trade ReturnsConstructing Carry Trade Returns
1. Begin with Swiss Franc as default currency to measure cumulative returns.• Also use Pound Sterling and American dollar for sensitivity
2. Each month, sort all 60 currencies (excluding base) by interest rate• Use interest rates implied by CIP through forward premium• Also use explicit interest rates
3. Form two portfolios• Short portfolio with lowest three interest rates (equally weighted)• Long portfolio with highest three interest rates• Also consider portfolios with five and ten currencies
4. Construct returns for (long, short and) long minus short portfolios
5. Each month, repeat steps 2-4
Negative Nominal Interest Rates and Exchange Rates 31
Carry Trade ReturnsCarry Trade ReturnsCarry Trade ReturnsCarry Trade Returns
075
150
-10
010
Flow returns
Jan 10 Jan 12 Jan 14 Jan 16
Swiss Franc, (3)
075
150
-10
010
Jan 10 Jan 12 Jan 14 Jan 16
Swiss Franc, (5)
075
150
Cumulative returns
-10
010
Jan 10 Jan 12 Jan 14 Jan 16
Swiss Franc, (10)
075
150
-10
010
Flow returns
Jan 10 Jan 12 Jan 14 Jan 16
Pound Sterling, (3)
075
150
-10
010
Jan 10 Jan 12 Jan 14 Jan 16
Pound Sterling, (5)
075
150
Cumulative returns
-10
010
Jan 10 Jan 12 Jan 14 Jan 16
Pound Sterling, (10)
075
150
-10
010
Flow returns
Jan 10 Jan 12 Jan 14 Jan 16
American Dollar, (3)
075
150
-10
010
Jan 10 Jan 12 Jan 14 Jan 16
American Dollar, (5)
075
150
Cumulative returns
-10
010
Jan 10 Jan 12 Jan 14 Jan 16
American Dollar, (10)
Flow/cumulative returns: thin/thick, solid/dashed line, left/right axis. Implicit interest rates.
Returns from long-short strategies in 3 base currencies (# currencies/portfolio)
Flow and Cumulative Excess Returns
Negative Nominal Interest Rates and Exchange Rates 32
Using Explicit Interest RatesUsing Explicit Interest RatesUsing Explicit Interest RatesUsing Explicit Interest Rates
025
50
-15
-55
Excess returns
Jan 10 Jan 12 Jan 14 Jan 16
Swiss Franc, (3)
025
50
-15
-55
Jan 10 Jan 12 Jan 14 Jan 16
Swiss Franc, (5)
025
50
Cumulative returns
-15
-55
Jan 10 Jan 12 Jan 14 Jan 16
Swiss Franc, (10)
025
50
-15
-55
Excess returns
Jan 10 Jan 12 Jan 14 Jan 16
Pound Sterling, (3)
025
50
-15
-55
Jan 10 Jan 12 Jan 14 Jan 16
Pound Sterling, (5)
025
50
Cumulative returns
-15
-55
Jan 10 Jan 12 Jan 14 Jan 16
Pound Sterling, (10)
025
50
-15
-55
Excess returns
Jan 10 Jan 12 Jan 14 Jan 16
American Dollar, (3)
025
50
-15
-55
Jan 10 Jan 12 Jan 14 Jan 16
American Dollar, (5)
025
50
Cumulative returns
-15
-55
Jan 10 Jan 12 Jan 14 Jan 16
American Dollar, (10)
% Flow/cumulative returns: thin/thick, solid/dashed line, left/right axis. LIBOR/Euro/National interest rates.
Returns from long-short strategies in 3 base currencies (# currencies/portfolio)
Flow and Cumulative Excess Returns
Negative Nominal Interest Rates and Exchange Rates 33
Carry Trade ReturnsCarry Trade ReturnsCarry Trade ReturnsCarry Trade Returns
• Pervasive but risky
• Higher with fewer currencies in portfolios
• But … do returns vary with NIRP?
• Estimate:
CARRYc,s,i,t = α + βNEGt + εc,s,i,t
• CARRYc,s,i,t monthly flow carry-trade return measured in currency c, with s currencies in both long/short portfolios, using measure i of interest rates (implicit in forward rates/explicit) at month t,
• NEGt importance of negative interest rates at t (Any? number?)
Negative Nominal Interest Rates and Exchange Rates 34
Returns from LongReturns from LongReturns from LongReturns from Long----Short Short Short Short PortfoliosPortfoliosPortfoliosPortfoliosand and and and Negative Interest Negative Interest Negative Interest Negative Interest RatesRatesRatesRates
Currency Portfolio
Size
Interest
Rates
Number of Negative
Interest Rate
Any Negative
Interest Rates
Swiss Franc 3 Implicit .002
(.002)
.006
(.007)
Swiss Franc 5 Implicit .001
(.001)
.007
(.006)
Swiss Franc 10 Implicit .000
(.001)
.002
(.004)
Pound Sterling 3 Implicit .002
(.002)
.007
(.007)
American Dollar 3 Implicit .002
(.002)
.006
(.007)
Swiss Franc 3 National -.003
(.002)
-.005
(.007)
Negative Nominal Interest Rates and Exchange Rates 35
Negative ResultsNegative ResultsNegative ResultsNegative Results
• No evidence that carry trade returns depend on negative nominal interest rates
Negative Nominal Interest Rates and Exchange Rates 36
ConclusionConclusionConclusionConclusion
• No evidence of strong effects of NIRP on exchange rate behavior• Volatility unaffected by level of interest rates, especially around 0
• UIP works better recently, but no differences around 0 interest rates
• Carry trade returns unaffected
• Caveat: have ignored most consequences of NIRP• Growth, inflation
• Bank profitability, micro-structural effects
• Financial Stability
• Another caveat: limited sample• Only 5 economies for limited period of time
Negative Nominal Interest Rates and Exchange Rates 37
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