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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 Leon-Ledesma

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.

Suggested Citation

  • Karine Gente & Miguel Leon-Ledesma, 2006. "Does the world real interest rate affect the real exchange rate? The South East Asian experience," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(4), pages 441-467.
    • Handle: RePEc:taf:jitecd:v:15:y:2006:i:4:p:441-467
    DOI: 10.1080/09638190601037443
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    Cited by:

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    2. Agus Salim & Kai Shi, 2019. "A Cointegration of the Exchange Rate and Macroeconomic Fundamentals: The Case of the Indonesian Rupiah vis-á-vis Currencies of Primary Trade Partners," JRFM, MDPI, vol. 12(2), pages 1-17, May.
    3. Joseph Zhi Bin Ling & Albert K. Tsui & Zhaoyong Zhang, 2021. "Trading Macro-Cycles of Foreign Exchange Markets Using Hybrid Models," Sustainability, MDPI, vol. 13(17), pages 1-20, September.
    4. Muhammad Kamran Khan & Jian-Zhou Teng & Muhammad Imran Khan, 2019. "Cointegration between macroeconomic factors and the exchange rate USD/CNY," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 5(1), pages 1-15, December.
    5. Syed Ali Raza & Sahar Afshan, 2017. "Determinants of Exchange Rate in Pakistan: Revisited with Structural Break Testing," Global Business Review, International Management Institute, vol. 18(4), pages 825-848, August.

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    More about this item

    Keywords

    Real exchange rate; overlapping generations; world interest rate shock;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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