Analysis of exchange rate fluctuations in Estonia: test of the interest parity condition and the open economy model

This study finds that the nominal exchange rate in Estonia is positively associated with the expected exchange rate and negatively influenced by real M1, the foreign interest rate, the expected inflation rate, and the relevant price. The coefficient of the government deficit spending/GDP ratio is negative and insignificant at the 10% level. Most of the exchange rate movements can be captured by the interest parity condition and the open economy model.