For over 30years, the empirical international finance literature has been unable to detect a clear systematic relationship between interest rates and the nominal exchange rate. We take a fresh look at the data and uncover a new stylized fact for a cross-section of countries: the relationship...

What is the relationship between interest rates and the exchange rate? The empirical literature in this area has been inconclusive. We use an optimizing model of a small open economy to rationalize the mixed empirical findings. The model has three key margins. First, higher domestic interest...