The Real Exchange Rate And Real Interest Differentials: The Role Of The Trend-Cycle Decomposition
We propose an alternative model and method to reconcile the puzzling feature in the relationship between the real exchange rate and real interest rate differentials. Our simple two-country model with preset prices, along with firms’ misperception about the future exchange rate, implies that the real exchange rate follows an ARIMA(0,1,p) process. This allows us to compute the exact Beveridge-Nelson decomposition, which is a model-consistent decomposition. In accordance with our model, unit roots in the real exchange rates are found; and statistical inference is partially found to be affirmative regarding the link between the real exchange rate detrended by the Beveridge-Nelson decomposition and corresponding real interest differentials.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 50 (2012)
Issue (Month): 4 (October)
|Contact details of provider:|| Postal: 18830 Brookhurst Street, Suite 304, Fountain Valley, CA 92708 USA|
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0095-2583
More information through EDIRC
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=0095-2583|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Asea, Patrick K & Reinhart, Carmen M, 1996.
"Le Prix de l'Argent: How (Not) to Deal with Capital Inflows,"
Journal of African Economies,
Centre for the Study of African Economies (CSAE), vol. 5(3), pages 231-271, October.
- Asea, Patrick K & Reinhart, Carmen M, 1996. "Economic Growth and Economic Consequences of External Shocks in Sub-Saharan Africa: Introduction," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 5(3), pages 1-6, October.
- Reinhart, Carmen & Asea, Patrick, 1995. "Real interest rate differentials and the real exchange rate: Evidence from four African countries," MPRA Paper 13357, University Library of Munich, Germany.
- Morley, James C., 2002. "A state-space approach to calculating the Beveridge-Nelson decomposition," Economics Letters, Elsevier, vol. 75(1), pages 123-127, March.
When requesting a correction, please mention this item's handle: RePEc:bla:ecinqu:v:50:y:2012:i:4:p:968-987. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.