Was It Real? The Exchange Rate-Interest Differential Ralation Over The Modern Floating-Rate Period
This paper explores the relation between real exchange rates and real interest rate differentials for the United States, West Germany, Japan, and the United Kingdom. Contrary to theories based on the joint hypothesis that domestic prices are sticky and monetary dis turbances are predominant, the authors find little evidence of a stab le relationship between real interest rates and real exchange rates. They consider both in-sample and out-of-sample tests. One hypothesis which is consistent with their findings is that real disturbances may be a major source of exchange rate volatility. Copyright 1988 by American Finance Association.
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