How does the world interest rate affect the real exchange rate?
This paper develops a two goods overlapping generations model (OLG) of a semi-small open economy. Due to the OLG structure, the world interest rate and the domestic rate of time preference need not to be equal. Consequently, this setting represents the minimal real framework to study the effects of a world interest rate shock on the real exchange rate (RER).We show that both medium and long-run effects of a positive interest rate shock depend on the net financial position of the domestic country vis-ý-vis the rest of the world. The path of the RER is non monotonic (undershooting) in the case of a creditor country, while the RER simply appreciates in a debtor country.
|Date of creation:||29 Aug 2002|
|Date of revision:|
|Contact details of provider:|| Postal: Office of the Secretary-General, Rm E35, The Bute Building, Westburn Lane, St Andrews, KY16 9AR, UK|
Phone: +44 1334 462479
Web page: http://www.res.org.uk/society/annualconf.asp
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:ecj:ac2002:84. 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: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.