Investigating the relationship between interest rate and exchange rate: Application to a VAR model

Finance and economic literature are awash with theories and researches linking exchange rate, interest rate and inflation. This paper investigates the relationship between exchange rate and interest rate for Iran, by using time series techniques such as unit root tests, co-integration test and impulse response function. The study used data for the period 1990 to 2015. The existance of cointegration among the variables implies that the long run relationship between inflation, interest rate and exchange rate is existent. The empirical results of this study have been unable to detect a clear systematic relationship between interest rates and exchange rates.