The Real Interest Differential Model after Twenty Years
AbstractIt has been twenty years since Frankel (1979) offered the classic empirical support for the Dornbusch (1976) overshooting model against the simple monetary approach model, and almost that long since Driskill and Sheffrin (1981) uncovered some important inconsistencies between Frankel’s theoretical framework and his empirical implementation. Frankel’s RID model nevertheless spawned a huge lit-erature in international monetary economics. In this paper, we replicate and update the Frankel (1979) and Driskill and Sheffrin (1981) results, in order to offer a retrospective and a reëvaluation of this lit-erature. We also explain why the model estimated by Driskill and Sheffrin (1981) cannot underpin a critique of Frankel (1979), a point which is not generally recognized. While specialists in international finance generally recognize that the initial promise of Frankel’s research has not been kept, we believe that many will be surprised nevertheless by our stark findings. JEL: F31, F40, C13
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Bibliographic InfoPaper provided by EconWPA in its series International Finance with number 9907002.
Length: 27 pages
Date of creation: 29 Jul 1999
Date of revision:
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exchange rates; real interest differential model;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
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