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The Long-Run Relationship Between Real Exchange Rates and Real Interest Rate Differentials: A Panel Study

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  • Ronald MacDonald

    (International Monetary Fund)

  • Jun Nagayasu

    (International Monetary Fund)

Abstract

This paper empirically examines the long-run relationship between real exchange rates and real interest rate (RERI) differentials over the recent floating exchange rate period. A panel cointegration estimator is applied to a data set of 14 industrialized countries. In contrast to much other research on the RERI model, we find evidence of statistically significant long-run relationships and plausible point estimates. The failure of most other researchers to establish such relationships may therefore reflect the estimation method used rather than any inherent deficiency in the real exchange rate-real interest rate relationship. Copyright 2000, International Monetary Fund

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

Volume (Year): 47 (2000)
Issue (Month): 1 ()
Pages: 5

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Handle: RePEc:pal:imfstp:v:47:y:2000:i:1:p:5

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  1. Baxter, Marianne, 1994. "Real exchange rates and real interest differentials: Have we missed the business-cycle relationship?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(1), pages 5-37, February.
  2. Hali J. Edison & William R. Melick, 1995. "Alternative approaches to real exchange rates and real interest rates: three up and three down," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 518, Board of Governors of the Federal Reserve System (U.S.).
  3. Jun Nagayasu, 1998. "Does the Long-Run Ppp Hypothesis Hold for Africa? Evidence From Panel Co-Integration Study," IMF Working Papers, International Monetary Fund 98/123, International Monetary Fund.
  4. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
  5. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad, 1999. "Relative labor productivity and the real exchange rate in the long run: evidence for a panel of OECD countries," Journal of International Economics, Elsevier, Elsevier, vol. 47(2), pages 245-266, April.
  6. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  7. Edison, Hali J. & Pauls, B. Dianne, 1993. "A re-assessment of the relationship between real exchange rates and real interest rates: 1974-1990," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(2), pages 165-187, April.
  8. Jeffrey A. Frankel & Andrew K. Rose, 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," NBER Working Papers 5006, National Bureau of Economic Research, Inc.
  9. MacDonald, Ronald, 2000. "Is the foreign exchange market 'risky'? Some new survey-based results," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 10(1), pages 1-14, January.
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