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Does the world real interest rate affect the real exchange rate? The South East Asian experience

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Karine Gente
Miguel León-Ledesma

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Abstract

We analyze the consequences of US real interest rate rises on the real exchange rate (RER) in a two-good overlapping generations model of a semi-small open economy. The equilibrium RER depreciates (appreciates) when the world interest rate increases in a debtor (creditor) country. We then study empirically the reaction of the RER in a set of South East Asian (SEA) countries to shocks in US real interest rates. The results support the conclusions of the theory model at least for Singapore, Thailand and South Korea during the period 1980 -- 2001. This points towards world interest rate shocks as possible trigger factors for exchange rate crises during the adjustment process towards the new equilibrium.

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Article provided by Taylor and Francis Journals in its journal Journal of International Trade & Economic Development.

Volume (Year): 15 (2006)
Issue (Month): 4 (December)
Pages: 441-467
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Handle: RePEc:taf:jitecd:v:15:y:2006:i:4:p:441-467

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Keywords: Real exchange rate; overlapping generations; world interest rate shock;

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