04-04-2017 07:04 AM
Im doing the follwoing regression:
CNY/USD = a+b(IRd-IRf)+e
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)?
04-05-2017 04:52 PM
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.