An empirical investigation of the International Fisher Effect

The purpose of this thesis is to describe the theory of the International Fisher Effect and test its empirical validity in the long run. The question asked for this thesis is if there is a tendency for nominal interest differentials to offset exchange rate changes? The International Fisher effect states that the future spot rate of exchange can be determined from the nominal interest differential. A regression analysis has been applied to quarterly nominal interest differentials and exchange rate changes for five country pairs between the years 1993-2000, except for US-Germany, which contains data for the years 1993-1998. The investigated country pairs are US- Sweden, US-Japan, US-UK, US-Canada and US-Germany. The regression tests whether nominal interest differentials are a good forecast for changes in the future spot rates of exchange for the tested time frame and respective country pair. The result shows that only for US-Japan are the nominal interest differentials, on average, offset by exchange rate changes. This means that the exchange rate movements react to other factors in addition to nominal interest differentials for the other country pairs.Validerat; 20101217 (root