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Does the world real interest rate affect the real exchange rate? The South East Asian experience

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  • Karine Gente
  • Miguel Leon-Ledesma

Abstract

We analyze the consequences of US real interest rate rises on the real exchange rate (RER) in a two-good overlapping generations model of a semi-small open economy. The equilibrium RER depreciates (appreciates) when the world interest rate increases in a debtor (creditor) country. We then study empirically the reaction of the RER in a set of South East Asian (SEA) countries to shocks in US real interest rates. The results support the conclusions of the theory model at least for Singapore, Thailand and South Korea during the period 1980 - 2001. This points towards world interest rate shocks as possible trigger factors for exchange rate crises during the adjustment process towards the new equilibrium.

Suggested Citation

  • Karine Gente & Miguel Leon-Ledesma, 2006. "Does the world real interest rate affect the real exchange rate? The South East Asian experience," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(4), pages 441-467.
  • Handle: RePEc:taf:jitecd:v:15:y:2006:i:4:p:441-467 DOI: 10.1080/09638190601037443
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    Cited by:

    1. Aloy, Marcel & Gente, Karine, 2009. "The role of demography in the long-run Yen/USD real exchange rate appreciation," Journal of Macroeconomics, Elsevier, pages 654-667.

    More about this item

    Keywords

    Real exchange rate; overlapping generations; world interest rate shock;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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