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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 ()

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Abstract

We analyse 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.

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Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number 0405.

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Date of creation: May 2004
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Handle: RePEc:ukc:ukcedp:0405

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Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
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Related research
Keywords: Real exchange rate; overlapping generations; world interest rate shock;

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Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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