DP11498 Exchange Rate Behavior with Negative Interest Rates: Some Early Negative Observations

Author(s): Allaudeen Hameed, Andrew K Rose
Publication Date: September 2016
Keyword(s): carry, daily, data, deviation, interest, nominal, parity, Trade, uncovered, volatility
JEL(s): F31, G15
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11498

This paper examines exchange rate behavior during the recent period with negative nominal interest rates. We use a daily panel of data of 61 currencies from Jan 2010 through May 2016; during this time five economies (Denmark, EMU, Japan, Sweden, and Switzerland) experienced negative nominal interest rates. We examine both effective exchange rates and bilateral rates, the latter typically measured against the Swiss franc since Switzerland has had the longest period of negative nominal rates. We examine exchange rate volatility, exchange rate changes, deviations from uncovered interest parity, and profits from the carry trade. We find that negative interest rates seem to have little effect on observable exchange rate behavior.