Citation:Perera, P.R.M.R., Silva, N.L.C. and Silva, N.K.L. 2016. The Impact of Interest Rate in Determining Exchange Rate: Revisiting Interest Rate Parity Theory. In Proceedings of the 2nd International Conference in Accounting Researchers and Educators (ICARE 2016), 11th January 2017. Department of Accountancy, Faculty of Commerce and Management Studies, University of Kelaniya, Sri Lanka.
Date:2016
Abstract:
The objective of this study is to examine the relationship between Interest rate
and the Exchange rate and to find the effect of changes in Interest rate on
Exchange rate volatilities. Exchange rate is sensitive to number of factors,
where Interest rate is identified as a major factor (Ozun & Cifter , 2010).
Central Bank of Sri Lanka provides quantitative evidence for the study, where
Sri Lanka Inter-Bank Offer Rate (SLIBOR) constitutes the independent
variable and US Dollar to Sri Lankan Rupee exchange rate represents
dependent variable. Sample spreads through 4 years and contains daily data.
Data set is proven to be normally distributed. Correlation and Linear
Regression Model is used to ascertain relationships. Results of the study are
consistent with Interest Rate Parity theory that discloses a strong positive
relationship between Interest rate and Exchange rate. This study extends the
literature on international financing and provides valuable information to
decision makers in small open economies and to the academia.
