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Real Interest Rates and Home Goods: A Two-Period Model


  • Hartley, Peter R
  • Kyle, Albert S


Using a simple model of a small, open economy that includes traded and nontraded goods and output in two periods, the authors demonstrate that changes in real interest rates will be associated with changes in real exchange rates. A high real interest rate will encourage consumers to substitute away from present and toward future consumption. To transfer consumption of nontraded goods intertemporally, intersectoral resource flows are required. In the simplest model, this in turn requires opposite movements in the real exchange rate over two periods. Copyright 1988 by The Economic Society of Australia.

Suggested Citation

  • Hartley, Peter R & Kyle, Albert S, 1988. "Real Interest Rates and Home Goods: A Two-Period Model," The Economic Record, The Economic Society of Australia, vol. 64(186), pages 168-177, September.
  • Handle: RePEc:bla:ecorec:v:64:y:1988:i:186:p:168-77

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    References listed on IDEAS

    1. Arthur Grimes & Jason Wong, 1992. "The role of the exchange rate in New Zealand monetary policy," Proceedings, Federal Reserve Bank of San Francisco, pages 176-197.
    2. Runkle, David E, 1987. "Vector Autoregressions and Reality," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 437-442, October.
    3. Lastrapes, William D, 1992. "Sources of Fluctuations in Real and Nominal Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 530-539, August.
    4. David E. Runkle, 1987. "Vector autoregressions and reality," Staff Report 107, Federal Reserve Bank of Minneapolis.
    5. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    6. David Gruen & Geoffrey Shuetrim, 1994. "Internationalisation and the Macroeconomy," RBA Annual Conference Volume,in: Philip Lowe & Jacqueline Dwyer (ed.), International Intergration of the Australian Economy Reserve Bank of Australia.
    7. Gruen, David W R & Wilkinson, Jenny, 1994. "Australia's Real Exchange Rate--Is It Explained by the Terms of Trade or by Real Interest Differentials?," The Economic Record, The Economic Society of Australia, vol. 70(209), pages 204-219, June.
    8. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    9. Andreas Fischer, 1993. "Inflation Targeting: The New Zealand and Canadian Cases," Cato Journal, Cato Journal, Cato Institute, vol. 13(1), pages 1-27, Spring/Su.
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