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The Real Exchange Rate in Small Open Developed Economies: Evidence from Cointegration Analysis

  • Debabrata Bagchi

    (Department of Finance, New York City)

  • Georgios E. Chortareas

    (Bank of England)

  • Stephen M. Miller

    (University of Nevada, Las Vegas, and University of Connecticut)

We examine the effects of the terms of trade and the expected real interest rate differential on the real exchange rate in a sample of small open developed economies. We employ cointegration analysis to search for possible long-term linkages. We find that while both the terms of trade and the expected real interest rate differentials affect the real exchange rate in the long run, the role of the terms of trade generally proves more consistent across countries. The speed of adjustment for the expected real interest rate differential in the error-correction model, however, is quantitatively larger than it is for the terms of trade.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2003-27.

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Length: 31 pages
Date of creation: Jun 2003
Date of revision:
Publication status: published in Economic Record, March 2004
Handle: RePEc:uct:uconnp:2003-27
Contact details of provider: Postal: University of Connecticut 365 Fairfield Way, Unit 1063 Storrs, CT 06269-1063
Phone: (860) 486-4889
Fax: (860) 486-4463
Web page: http://www.econ.uconn.edu/

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