Interpreting first difference interest rate differentials

[SASlinn]

Hi everybody,

Im doing the follwoing regression:

CNY/USD = a+b(IRd-IRf)+e

Where..

CNY/USD = nominal exchange rate between China and the US (quoted indirect so USD pr CNY)

(IRd-IRf) = Interest rate differentials between Domestic (China) and Foreign (US).

As both variables are non-stationary I end up taking the first difference on both variables. So my question is, how do I interpret the beta coefficient of the interest rate differential variable when it is in first order I(1) (first difference)?

Thanks,

SASlinn

[alexchien · Accepted solution]

you can think of the beta to be the effect of the change of the interest rate differentials on the change of the nominal exchange rate.

Alex