A re-assessment of the relationship between real exchange rates and real interest rates: 1974-1990
The general view of the economics profession is that we can not explain exchange rate movements. However, some researchers still contend that the relationship between real interest rates and the real exchange rate is a useful framework for thinking about exchange rate movements. This paper asks whether there is such a systematic relationship and whether it is revealed by the data. In our attempt to find such a relationship we investigate whether the empirical results are conditional on: (1) the time period selected, (2) the choice of interest rate, (3) the measure of expected inflation, and (4) the choice of exchange rate. The results show that exchange rates and interest rates, both nominal and real are nonstationary; however, they are not cointegrated with each other. On the other hand, the dynamic models indicate that there might be a long-run relationship between these variables, but cannot corroborate this. Consequently, the final conclusion is that the empirical results do not confirm the relationship and this result is robust across exchange rates, time periods, interest rates, and inflation measures.
(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.
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.:
- Hali J. Edison & Eric Fisher, 1989.
"A long-run view of the european monetary system,"
International Finance Discussion Papers
339, Board of Governors of the Federal Reserve System (U.S.).
- Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
- Phillips, P C B, 1987.
"Time Series Regression with a Unit Root,"
Econometric Society, vol. 55(2), pages 277-301, March.
- Peter C.B. Phillips, 1985. "Time Series Regression with a Unit Root," Cowles Foundation Discussion Papers 740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
- Tom Doan, . "PPUNIT: RATS procedure to perform Phillips-Perron Unit Root test," Statistical Software Components RTS00160, Boston College Department of Economics.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-22, September.
- Meese, Richard, 1990. "Currency Fluctuations in the Post-Bretton Woods Era," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 117-34, Winter.
- Boughton, James M., 1987. "Tests of the performance of reduced-form exchange rate models," Journal of International Economics, Elsevier, vol. 23(1-2), pages 41-56, August.
- Hendry, David F. & Pagan, Adrian R. & Sargan, J.Denis, 1984. "Dynamic specification," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 18, pages 1023-1100 Elsevier.
- Campbell, John Y. & Clarida, Richard H., 1987.
"The dollar and real interest rates,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 27(1), pages 103-139, January.
- Campbell, John & Clarida, Richard, 1987. "The Dollar and Real Interest Rates," Scholarly Articles 3221495, Harvard University Department of Economics.
- John Y. Campbell & Richard H. Clarida, 1987. "The Dollar and Real Interest Rates," NBER Working Papers 2151, National Bureau of Economic Research, Inc.
- Andrew C. Harvey, 1990. "The Econometric Analysis of Time Series, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026208189x, June.
- Cletus C. Coughlin & Kees Koedijk, 1990. "What do we know about the long-run real exchange rate?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 36-48.
- Hooper, Peter & Morton, John, 1982. "Fluctuations in the dollar: A model of nominal and real exchange rate determination," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 39-56, January.
- Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
- Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
When requesting a correction, please mention this item's handle: RePEc:eee:moneco:v:31:y:1993:i:2:p:165-187. 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: (Zhang, Lei)
If references are entirely missing, you can add them using this form.