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Real Interest Rates and Home Goods: A Two‐Period Model

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  • PETER R. HARTLEY
  • ALBERT S. KYLE

Abstract

Using a simple model of a small open economy which includes traded and non‐traded goods and output in two periods, we demonstrate that changes in real interest rates will be associated with changes in real exchange rates. A high real interest rate will encourage consumers to substitute away from present and toward future consumption. To transfer consumption of non‐traded goods intertemporally, intersectoral resource flows are required In the simplest model, this in turn requires opposite movements in the real exchange rate over two periods.

Suggested Citation

  • Peter R. Hartley & Albert S. Kyle, 1988. "Real Interest Rates and Home Goods: A Two‐Period Model," The Economic Record, The Economic Society of Australia, vol. 64(3), pages 168-177, September.
    • Handle: RePEc:bla:ecorec:v:64:y:1988:i:3:p:168-177
    DOI: 10.1111/j.1475-4932.1988.tb02055.x
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    References listed on IDEAS

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    1. Jacob A. Frenkel & Assaf Razin, 1986. "Fiscal Policies and Real Exchange Rates in the World Economy," NBER Working Papers 2065, National Bureau of Economic Research, Inc.
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    3. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-153, February.
    4. W. E. G. Salter, 1959. "Internal And External Balance: The Role Op Price And Expenditure Effects," The Economic Record, The Economic Society of Australia, vol. 35(71), pages 226-238, August.
    5. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-594, June.
    6. Richard H. Snape, 1977. "Effects Of Mineral Development On The Economy," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 21(3), pages 147-156, December.
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    9. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
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    Cited by:

    1. Jonathan D. Ostry, 1994. "Government Purchases and Relative Prices in a Two‐Country World," The Economic Record, The Economic Society of Australia, vol. 70(209), pages 149-161, June.

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