Abstract:
Purpose – This paper aims to investigate whether the interest rate differentials Granger cause expected change
in the exchange rate during the COVID-19 period. The study examines if the investors in the international assets
and exchange rate markets take advantages of the relevant information obtained during the COVID-19 pandemic.
Design/methodology/approach – This paper used daily data ranging from January 31, 2020 to June 30,
2020 and considered BRIICS economies. The study implemented the Toda–Yamamoto’s Granger causality
approach to identify the causality between interest rate differentials and exchange rates. For robustness
checks, the study used ARLD short-run dynamics to infer causal relations.
Findings – Overall, the results indicate that the interest rate differentials improve the predictability of
subsequent exchange rate changes in all six BRIICS economies during the COVID-19 period wherein investors
are forward-looking. The empirical results pass the robustness checks.
Originality/value – There is a lack of studies exploring the relationship between interest rate differentials
and exchange rates in the presence of an unanticipated event such as the current pandemic. To the best of the
authors’ knowledge, this is the first study to explore the causal linkages between interest rate differentials and
expected change in exchange rates, focusing on the COVID-19 outbreak period
