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

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  • PETER R. HARTLEY
  • ALBERT S. KYLE

Abstract

Using a simple model of a small open economy which includes traded and non‐traded goods and output in two periods, we 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 non‐traded 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.

Suggested Citation

  • Peter R. Hartley & Albert S. Kyle, 1988. "Real Interest Rates and Home Goods: A Two‐Period Model," The Economic Record, The Economic Society of Australia, vol. 64(3), pages 168-177, September.
    • Handle: RePEc:bla:ecorec:v:64:y:1988:i:3:p:168-177
    DOI: 10.1111/j.1475-4932.1988.tb02055.x
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    References listed on IDEAS

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    3. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-153, February.
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    Cited by:

    1. Jonathan D. Ostry, 1994. "Government Purchases and Relative Prices in a Two‐Country World," The Economic Record, The Economic Society of Australia, vol. 70(209), pages 149-161, June.

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