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Exchange Rates and the Term Structure of Interest Rates

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  • James M. Boughton

    (International Monetary Fund)

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    Abstract

    It is shown that the empirical performance of asset-market models of exchange rates for key currencies can be improved by including information about the term structure of interest rate differentials. The paper extends a portfolio-balance model by including both long- and short-term interest rates as determining variables. Estimation of the model indicates that real exchange rates for the United States, Japan, and the Federal Republic of Germany are affected both by nominal short-term interest differentials and by real long-term differentials.

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

    Volume (Year): 35 (1988)
    Issue (Month): 1 (March)
    Pages: 36-62

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    Handle: RePEc:pal:imfstp:v:35:y:1988:i:1:p:36-62

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    Cited by:
    1. Sarantis, Nicholas, 2006. "On the short-term predictability of exchange rates: A BVAR time-varying parameters approach," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2257-2279, August.
    2. Masao Ogaki & Julio Santaella, 1999. "The Exchange Rate and the Term Structure of Interest Rates in Mexico," Working Papers 99-21, Ohio State University, Department of Economics.
    3. Drakos, Konstantinos, 2003. "The term structure of deviations from the interest parity," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(1), pages 57-67, February.
    4. François Renard & Michel Boutillier & Camille Baulant, 1992. "Taux d'intérêt et comportements spéculatifs sur le marché du franc français," Économie et Prévision, Programme National Persée, vol. 106(5), pages 97-108.

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