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Determinants of the real exchange rate in a small open economy: Evidence from Canada

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  • Kia, Amir

Abstract

This study develops a theoretical monetary model of the real exchange rate and shows that over the long run the real exchange rate is a function of real money supply, domestic and foreign interest rate, real GDP, real government expenditure, deficit per GDP, domestic and foreign outstanding debt per GDP, domestic and foreign externally financed debt per GDP and commodity price. The model was tested on Canadian data (1972Q1–2010Q3 period). It was found that all variables, except real money supply, domestic and foreign interest rate and domestic externally financed debt have a statistically significant impact on the real exchange rate in Canada. However, the domestic fiscal variables do not have any impact on the real exchange rate over the short run. The change in interest rate, the growth of money supply, the commodity price and the US debt per GDP have a negative impact on the growth of the real exchange rate over the short run.

Suggested Citation

  • Kia, Amir, 2013. "Determinants of the real exchange rate in a small open economy: Evidence from Canada," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 163-178.
  • Handle: RePEc:eee:intfin:v:23:y:2013:i:c:p:163-178 DOI: 10.1016/j.intfin.2012.09.001
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    Cited by:

    1. Njindan Iyke, Bernard, 2015. "Macro Determinants of the Real Exchange Rate in a Small Open Small Island Economy: Evidence from Mauritius via BMA," MPRA Paper 68968, University Library of Munich, Germany.
    2. Works, Richard Floyd, 2016. "Econometric modeling of exchange rate determinants by market classification: An empirical analysis of Japan and South Korea using the sticky-price monetary theory," MPRA Paper 76382, University Library of Munich, Germany.
    3. Al-Shboul, Mohammad & Anwar, Sajid, 2014. "Pricing of the currency risk in the Canadian equity market," Research in International Business and Finance, Elsevier, vol. 30(C), pages 173-194.
    4. del Rosío Barajas-Escamilla María & Kia Amir & Sotomayor Maritza, 2016. "Concepts and Measurements of Economic Interdependence: The Case of the United States and Mexico," Global Economy Journal, De Gruyter, vol. 16(1), pages 63-90, March.
    5. Raputsoane, Leroi, 2016. "Real effective exchange rates comovements and the South African currency," MPRA Paper 68667, University Library of Munich, Germany.

    More about this item

    Keywords

    Real exchange rate; Monetary policy; Debt; Deficit and foreign financing;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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