IDEAS home Printed from https://ideas.repec.org/p/cwl/cwldpp/810.html
   My bibliography  Save this paper

Interest Rate and Exchange Rate Determination

Author

Abstract

It is well known that modeling exchange rates is difficult. Meese and Rogoff's (1983) results show that a random walk model performs as well as or better than a variety of structural models, where the forecasts from the structural models are based on the actual values of the future explanatory variables. Because of these and other results, the view has become fairly widespread that structural models of exchange rates are not very good. There is, however, somewhat of a dichotomy in the literature between those who deal with small models, where the focus is almost exclusively on exchange rates, and those who deal with large macroeconometric models, where exchange rates make up only a small subset of the endogenous variables. One might have thought, for example, that in a survey like Levich's (1985) both types of models would be considered, but the large models are given only one footnote (fn. 19, p. 1001). It may be that exchange rate determination within the context of large models has not been given a sufficient hearing. Exchange rate and interest rate equations are estimated and analyzed for 17 countries in this paper. This study is part of a larger project of constructing a multicountry econometric model. One of the aims of this paper is to see if the exchange rate equations that are part of my multicountry model also suffer from the Meese and Rogoff criticism. The results show that the view that structural exchange rate models are not very good may be too pessimistic. The theory upon which the multicountry econometric model is based is outlined in Section II. The exchange rate and interest rate equations are estimated in Section III and tested in Section IV.

Suggested Citation

  • Ray C. Fair, 1986. "Interest Rate and Exchange Rate Determination," Cowles Foundation Discussion Papers 810, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:810
    as

    Download full text from publisher

    File URL: http://cowles.yale.edu/sites/default/files/files/pub/d08/d0810.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ray C. Fair, 1984. "The Use of Expected Future Variables in Macroeconometric Models," NBER Working Papers 1445, National Bureau of Economic Research, Inc.
    2. Fair, Ray C, 1980. "Estimating the Expected Predictive Accuracy of Econometric Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(2), pages 355-378, June.
    3. Levich, Richard M., 1985. "Empirical studies of exchange rates: Price behavior, rate determination and market efficiency," Handbook of International Economics,in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 19, pages 979-1040 Elsevier.
    4. Fair, Ray C., 1979. "A model of the balance of payments," Journal of International Economics, Elsevier, vol. 9(1), pages 25-46, February.
    5. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    Full references (including those not matched with items on IDEAS)

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cwl:cwldpp:810. 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: (Matthew Regan). General contact details of provider: http://edirc.repec.org/data/cowleus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.