References 6
The Relationship between Interest Rates and Exchange Rates in Australia
1.0 Introduction
In macroeconomics, large scale market-wide factors are considered. Commonly, macroeconomic factors are considered in order to support decision-making, particularly for firms seeking to perform international business (Goodwin, Nelson, Harris, Torras & Roach, 2013). Two of the most important rates influencing decisions of international finance are the interest rate and the exchange rate (Terra, 2015). The interest rate is the percent cost to rent money, and the exchange rate is the value of one form of currency against another. Firms examining options with regard to how to invest money or where to operate will consider the interest rate and exchange rate to understand whether the cost of money when doing business internationally will be detrimental or favorable to the organization and to what extent (Brooks, 2014).
It is therefore the purpose of this report to understand the relationship between exchange rates and interest rates. The interest rate is the percent cost to rent money, hence the cost tied to taking out loans can influence a firms decision to extend operations into another country. The exchange rate is the value of one form of currency against another, therefore, it is important to understand profitability when converted. The volatility of these numbers can have a significant effect on the choices made by management (Frenkel & Johnson, 2013). Management must understand the influence that these numbers have on one another, and be able to precisely project future volatility of the exchange and interest rates in order to make strong decisions.
2.0 Factors influencing interest rates
Discuss interest rates as a dynamic macroeconomic factor contingent on policy, economy and society elements
Discuss the influence of political gain (Acemoglu & Robinson, 2013)
Discuss the influence of inflation (Gali, 2015)
Discuss the influence of taxation (Tanzi, 2014)
Discuss the influence of banks (Wu & Xia, 2016)
Discuss the influence of the economy (Palley, 2015)
3.0 Factors influencing exchange rates
Discuss exchange rates as a macroeconomic factor contingent on international and domestic economic elements
Discuss the demand for money (MacDonald & Stein, 2012)
Discuss the supply of currency (Wilander, 2013)
Discuss the influence of international economics (Frienden, 2014)
4.0 Relationship between interest rates and exchange rates
Identify similar factors related between interest and exchange rates (Engel, 2014)
Discuss reasons for a link between interest and exchange rates (Bacchetta & VanWincoop, 2013)
4.1 Predicting the relationship between interest rates and exchange rates
The relationship between interest rates and exchange rates is examined from 2000-2015 (Appendix A). Figure 1 illustrates interest rates from 2000 to 2015, while Figure 2 illustrates interest rates from 2000-2015.These numbers can be used in order to predict future interest rates and exchange rates.
Figure 1. Interest rates in Australia from 2000 to 2015.
Figure 2. Exchange rates between the USD and the Australian dollar from 2000 to 2015.
5.0 Conclusion
Express the importance of interest and exchange rates to one another
Synthesize the graph in the context of interest rate and exchange rate literature
Conclude on the value that each factor has to one another
References
Acemoglu, D., & Robinson, J. A. (2013). Economics versus politics: Pitfalls of policy advice. The Journal of Economic Perspectives, 27(2), 173-192.
Bacchetta, P., & Van Wincoop, E. (2013). On the unstable relationship between exchange rates and macroeconomic fundamentals. Journal of International Economics, 91(1), 18-26.
Brooks, C. (2014). Introductory Econometrics for Finance. Cambridge University Press.
Engel, C. (2016). Exchange Rates, Interest Rates, and the Risk Premium.The American Economic Review, 106(2), 436-474.
Frenkel, J. A., & Johnson, H. G. (2013). The Economics of Exchange Rates. Routledge.
Frieden, J. A. (2014). Currency politics: The political economy of exchange rate policy. Princeton University Press.
Galí, J. (2015). Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework and its applications. Princeton University Press.
Goodwin, N., Nelson, J., Harris, J., Torras, M., & Roach, B. (2013).Macroeconomics in Context. ME Sharpe.
MacDonald, R., & Stein, J. L. (Eds.). (2012). Equilibrium Exchange Rates. Springer Science & Business Media.
Palley, T. I. (2015). Money, fiscal policy, and interest rates: a critique of modern monetary theory. Review of Political Economy, 27(1), 1-23.
Tanzi, V. (2014). Inflation, indexation and interest income taxation. PSL Quarterly Review, 29(116).
Terra, C. (2015). Principles of International Finance and Open Economy Macroeconomics: Theories, Applications, and Policies. Academic Press.
Wilander, F. (2013). An empirical analysis of the currency denomination in international trade.
Wu, J. C., & Xia, F. D. (2016). Measuring the macroeconomic impact of monetary policy at the zero lower bound. Journal of Money, Credit and Banking, 48(2-3), 253-291.
APPENDIX A: Table of Interest and Exchange Rates
