A new interpretation of the exchange rate-yield differential nexus
AbstractEmpirical studies have had difficulty in establishing the long-run relationship between real exchange rates and real yield differentials predicted by sticky price exchange rate models. We revisit this issue in a nonstationary panel regression framework. This facilitates estimation of a long-run parameter even when the underlying relation-ship is subject to permanent shocks or the variables do not cointegrate. The slope coefficient estimate from a sample of 23 industrialized countries 1973M1-1998M12 has the correct sign and is statistically significant for both short and long-term yields. These results support fundamentals-based models of exchange rate behaviour while permitting real factors to play a role. Moreover, they indicate that capital markets integration is more advanced than hitherto believed. Copyright © 2004 John Wiley & Sons, Ltd.
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Bibliographic InfoArticle provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.
Volume (Year): 9 (2004)
Issue (Month): 3 ()
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Web page: http://www.interscience.wiley.com/jpages/1076-9307/
Other versions of this item:
- Andrew Wood & Jerry Coakley & Ana-Maria Fuertes, 2003. "A New Interpretation of the Exchange Rate - Yield Differential Nexus," Computing in Economics and Finance 2003 160, Society for Computational Economics.
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- F31 - International Economics - - International Finance - - - Foreign Exchange
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