Interest rate differentials drive currency values, impacting global exchange rates.
The article explores how changes in interest rates affect exchange rates in the long run. The researchers found that when interest rate differentials increase, the home currency appreciates. This relationship was observed in the exchange rates of the U.S. dollar against the Deutsche mark, British pound, Japanese yen, and Canadian dollar. The study suggests that interest rate differentials play a significant role in determining exchange rates, especially for currencies where purchasing power parity holds true.