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On the equality of Real Interest Rates across borders in Integrated Capital Markets

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  • Minford, Patrick

    ()
    (Cardiff Business School)

  • Peel, David

Abstract

The purpose in this letter is first to review briefly the empirical results on the relationship between real interest rates and real exchange rates; this empirical literature provides little support for the hypothesis of Roll that expected real interest rates are equal in general. Our second aim is to discuss the theoretical conditions that have to be met for his hypothesis to hold.

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Bibliographic Info

Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2005/3.

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Length: 9 pages
Date of creation: Nov 2005
Date of revision:
Publication status: Published in Open Economies Review , 18 (1), 2007
Handle: RePEc:cdf:wpaper:2005/3

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Keywords: Real interest rates; Real Exchange rates; Roll;

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  1. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-79, August.
  2. Francis X. Diebold & Atsushi Inoue, 2000. "Long Memory and Regime Switching," NBER Technical Working Papers 0264, National Bureau of Economic Research, Inc.
  3. Mathias Hoffmann & Ronald MacDonald, 2003. "A Re-examination of the Link between Real Exchange Rates and Real Interest Rate Differentials," CESifo Working Paper Series 894, CESifo Group Munich.
  4. Mark P. Taylor & Lucio Sarno, 2004. "International real interest rate differentials, purchasing power parity and the behaviour of real exchange rates: the resolution of a conundrum," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(1), pages 15-23.
  5. Dutton, Marilyn Miller, 1993. "Real interest rate parity new measures and tests," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 62-77, February.
  6. Cheung, Yin-Wong & Lai, Kon S., 2000. "On cross-country differences in the persistence of real exchange rates," Journal of International Economics, Elsevier, vol. 50(2), pages 375-397, April.
  7. Francis X. Diebold & Steven Husted & Mark Rush, 1990. "Real exchange rates under the gold standard," Discussion Paper / Institute for Empirical Macroeconomics 32, Federal Reserve Bank of Minneapolis.
  8. 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 518, Board of Governors of the Federal Reserve System (U.S.).
  9. Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
  10. Baxter, Marianne, 1994. "Real exchange rates and real interest differentials: Have we missed the business-cycle relationship?," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 5-37, February.
  11. Georgios E. Chortareas & Rebecca L. Driver, 2001. "PPP and the real exchange rate-real interest rate differential puzzle revisited: evidence from non-stationary panel data," Bank of England working papers 138, Bank of England.
  12. Lai, Kon S, 1997. "Long-Term Persistence in the Real Interest Rate: Some Evidence of a Fractional Unit Root," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(3), pages 225-35, July.
  13. Aaron Smallwood & Stefan C. Norrbin, 2008. "An Encompassing Test of Real Interest Rate Equalization," Review of International Economics, Wiley Blackwell, vol. 16(1), pages 114-126, 02.
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Cited by:
  1. Claeys, Peter & Moreno, Rosina & SuriƱach, Jordi, 2012. "Debt, interest rates, and integration of financial markets," Economic Modelling, Elsevier, vol. 29(1), pages 48-59.
  2. Peter Claeys & Rosina Moreno & Jordi SuriƱach, 2008. "Fiscal policy and interest rates: the role of financial and economic integration," IREA Working Papers 200810, University of Barcelona, Research Institute of Applied Economics, revised Sep 2008.

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