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Real Interest Rates And Real Exchange Rates: Evidence From Indexed Bonds

  • Michael Bleaney

    (University of Nottingham)

  • Douglas Laxton

    (International Monetary Fund)

Uncovered interest parity has found little empirical support at short horizons.Subtracting expected inflation differentials from both sides of the uncovered interestparity relationship implies a similar relationship between real interest rate differentials and expected real exchange rate movements. Previous empirical work that has attemptedto test for this relationship has found little empirical support. Using measures of real interest rates derived from indexed bonds, we find that real exchange ratesmove in the direction predicted by real interest rate differentials, and that previousnegative results are probably attributable to errors in estimating inflation expectations. Copyright Blackwell Publishing Ltd and The Victoria University of Manchester 2003

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Article provided by University of Manchester in its journal The Manchester School.

Volume (Year): 71 (2003)
Issue (Month): 1 (January)
Pages: 65-77

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Handle: RePEc:bla:manchs:v:71:y:2003:i:1:p:65-77
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