How Does the Interest Rate Influence the Exchange Rate?

Abstract

Understanding the effect of increasing the key policy rate on the exchange rate of the national currency remains one of the most critical issues for central banks. The goal of this study is to infer about the signs and the magnitude of this impact using existing studies conducted for 30 countries and aggregating estimates applying the meta-analysis procedure. Results indicate that the short-term impact of interest rate changes on the exchange rate is positive and statistically significant, although the economic significance is weak, while the longterm relationship is found to be insignificant. The analyzed studies do not reveal any evidence of publication bias, which contributes to the validity of empirical findings. The received results conclude that there might be a short-term appreciation of the hryvnia in response to an increase in the key policy rate in Ukraine.