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A new interpretation of the exchange rate-yield differential nexus

Author

Listed:
  • Jerry Coakley

    (Department of Accounting, Finance and Management, University of Essex, UK)

  • Ana-Maria Fuertes

    (Faculty of Finance, Sir John Cass Business School, UK)

  • Andrew Wood

    (Department of Accounting, Finance and Management, University of Essex, UK)

Abstract

Empirical studies have had difficulty in establishing the long-run relationship between real exchange rates and real yield differentials predicted by sticky price exchange rate models. We revisit this issue in a nonstationary panel regression framework. This facilitates estimation of a long-run parameter even when the underlying relation-ship is subject to permanent shocks or the variables do not cointegrate. The slope coefficient estimate from a sample of 23 industrialized countries 1973M1-1998M12 has the correct sign and is statistically significant for both short and long-term yields. These results support fundamentals-based models of exchange rate behaviour while permitting real factors to play a role. Moreover, they indicate that capital markets integration is more advanced than hitherto believed. Copyright © 2004 John Wiley & Sons, Ltd.

Suggested Citation

  • Jerry Coakley & Ana-Maria Fuertes & Andrew Wood, 2004. "A new interpretation of the exchange rate-yield differential nexus," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(3), pages 201-218.
  • Handle: RePEc:ijf:ijfiec:v:9:y:2004:i:3:p:201-218
    DOI: 10.1002/ijfe.230
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    References listed on IDEAS

    as
    1. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters,in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
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    4. John Y. Campbell & Robert J. Shiller, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Oxford University Press, vol. 58(3), pages 495-514.
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    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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