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On the Equality of Real Interest Rates Across Borders in Integrated Capital Markets

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  • Minford, Patrick
  • Peel, David

Abstract

The purpose in this letter is first to review briefly the empirical results on the relationship between real interest rates and real exchange rates; this empirical literature provides little support for the hypothesis of Roll that expected real interest rates are equal in general. Our second aim is to discuss the theoretical conditions that have to be met for his hypothesis to hold.

Suggested Citation

  • Minford, Patrick & Peel, David, 2006. "On the Equality of Real Interest Rates Across Borders in Integrated Capital Markets," CEPR Discussion Papers 5611, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5611
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    References listed on IDEAS

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    1. Diebold, Francis X & Husted, Steven & Rush, Mark, 1991. "Real Exchange Rates under the Gold Standard," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1252-1271, December.
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    3. Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
    4. Baxter, Marianne, 1994. "Real exchange rates and real interest differentials: Have we missed the business-cycle relationship?," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 5-37, February.
    5. Cheung, Yin-Wong & Lai, Kon S., 2000. "On cross-country differences in the persistence of real exchange rates," Journal of International Economics, Elsevier, vol. 50(2), pages 375-397, April.
    6. Mathias Hoffmann & Ronald MacDonald, 2003. "A Re-examination of the Link between Real Exchange Rates and Real Interest Rate Differentials," CESifo Working Paper Series 894, CESifo Group Munich.
    7. Dutton, Marilyn Miller, 1993. "Real interest rate parity new measures and tests," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 62-77, February.
    8. Aaron Smallwood & Stefan C. Norrbin, 2008. "An Encompassing Test of Real Interest Rate Equalization," Review of International Economics, Wiley Blackwell, vol. 16(1), pages 114-126, February.
    9. Diebold, Francis X. & Inoue, Atsushi, 2001. "Long memory and regime switching," Journal of Econometrics, Elsevier, pages 131-159.
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    12. Mark P. Taylor & Lucio Sarno, 2004. "International real interest rate differentials, purchasing power parity and the behaviour of real exchange rates: the resolution of a conundrum," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(1), pages 15-23.
    13. Georgios E. Chortareas & Rebecca L. Driver, 2001. "PPP and the real exchange rate-real interest rate differential puzzle revisited: evidence from non-stationary panel data," Bank of England working papers 138, Bank of England.
    14. Lai, Kon S, 1997. "Long-Term Persistence in the Real Interest Rate: Some Evidence of a Fractional Unit Root," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(3), pages 225-235, July.
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    Cited by:

    1. Peter Claeys & Rosina Moreno & Jordi SuriƱach, 2008. "Fiscal policy and interest rates: the role of financial and economic integration," IREA Working Papers 200810, University of Barcelona, Research Institute of Applied Economics, revised Sep 2008.
    2. Claeys, Peter & Moreno, Rosina & SuriƱach, Jordi, 2012. "Debt, interest rates, and integration of financial markets," Economic Modelling, Elsevier, vol. 29(1), pages 48-59.

    More about this item

    Keywords

    real exchange rates; real interest rates; roll;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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