The Long-run Relationship between Real Exchange Rate and Real Interest Rate in Asian Countries: An Application of Panel Cointegration
The role of exchange rate policy in economic development has been the subject of much debate and controversy in the development literature. Interest rates and exchange rates are usually viewed as important in the transmission of monetary impulses to the real economy. In the short run the standard view of academics and policy-makers is that a monetary expansion lowers the interest rate and rises the exchange rate, with these price changes then affecting the level and composition of aggregate demand. Frequently, these influences are described as the liquidity effects of monetary expansion, viewed as the joint effect of providing larger quantities of money to the private sector. Popular theories of exchange-rate determination also predict a link between real exchange rates and real interest rate differentials. These theories combine the uncovered interest parity relationship with the assumption that the real exchange rate deviates from its long-run level only temporarily. Under these assumptions, shocks to the real exchange rate—which are often viewed as caused by shocks to monetary policy—are expected to reverse themselves over time. This study investigates the long-run relationship between real exchange rates and real interest rate differentials using recently developed panel cointegration technique. Although this kind of relationship has been studied by a number of researchers,1 very little evidence in support of the relationship has been reported in the case of developing countries.
Volume (Year): 40 (2001)
Issue (Month): 4 ()
|Contact details of provider:|| Postal: |
Web page: http://www.pide.org.pk
More information through EDIRC
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.:
- Dornbusch, Rudiger, 1976.
" The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 78(2), pages 255-75.
- R. Dornbusch, 1975. "The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy," Working papers 165, Massachusetts Institute of Technology (MIT), Department of Economics.
- Imad A. Moosa & Razzaque H. Bhatti, 1996. "The European Monetary System and Real Interest Parity: Is there any Connection?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 132(II), pages 223-235, June.
- Imad Moosa & Razzaque Bhatti, 1996. "Does Europe have an integrated capital market? Evidence from real interest parity tests," Applied Economics Letters, Taylor & Francis Journals, vol. 3(8), pages 517-520.
- 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.
- Moosa, Imad A & Bhatti, Razzaque H, 1996. "Some Evidence on Mean Reversion in ex ante Real Interest Rates," Scottish Journal of Political Economy, Scottish Economic Society, vol. 43(2), pages 177-91, May.
- 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.
- Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 200-224.
- Suzanne McCoskey & Chihwa Kao, 1998.
"A residual-based test of the null of cointegration in panel data,"
Taylor & Francis Journals, vol. 17(1), pages 57-84.
- Chihwa Kao & Suzanne McCoskey, 1997. "A Residual-Based Test Of The Null Of Cointegration In Panel Data," Econometrics 9711002, EconWPA.
When requesting a correction, please mention this item's handle: RePEc:pid:journl:v:40:y:2001:i:4:p:577-602. 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: (Khurram Iqbal)
If references are entirely missing, you can add them using this form.