Interest Rates and the Exchange Rate: Some international Evidence

This paper attempts to examine the behaviour of the exchange rate in response to a change in interest rate differential. The empirical results of the study based on mounthly data from Britain, Canada, Germany and Japan provide support for Dornbusch's "overshooting" exchange rate in the short-run. However, in contrast to Dornbusch's proposition, thethe hypothesis of purchasing power parity is not empirically supported and the real exchange rates appeared to be non-stationary in all four cases.