IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Are Real Interest Differentials Caused by Frictions in Goods or Assets Markets, Real or Nominal Shocks?

  • Alex Luiz Ferreira

    ()

The variance of real interest rate differentials (rids) is decomposed between ex post deviations from relative purchasing power parity and uncovered interest rate parity (UIRP) for a set of emerging markets from 1995M5 to 2004M3. The results point out to nominal interest rate differentials and ex post deviations from UIRP as the main source of volatility in rids. In order to uncover the dynamic effects of real and monetary disturbances, I estimated a bivariate VAR with rids and nominal interest rate differentials. Forecast error variance decomposition using short run restrictions on the VAR strongly supports the claim that money shocks are unable to explain the variability of rids at longer horizons. Long-run restrictions results in real shocks as the likely cause of rids. Analysis of impulse response functions demonstrates that the net impact of a (one standard deviation) real shock on rids after 36 months is large.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: ftp://ftp.ukc.ac.uk/pub/ejr/RePEc/ukc/ukcedp/0407.pdf
Download Restriction: no

Paper provided by School of Economics, University of Kent in its series Studies in Economics with number 0407.

as
in new window

Length:
Date of creation: Aug 2004
Date of revision:
Handle: RePEc:ukc:ukcedp:0407
Contact details of provider: Postal:
School of Economics, University of Kent, Canterbury, Kent, CT2 7NP

Phone: +44 (0)1227 827497
Web page: http://www.kent.ac.uk/economics/

Order Information: Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
  2. Stockman, Alan C., 1988. "Real exchange-rate variability under pegged and floating nominal exchange-rate systems: An equilibrium theory," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 259-294, January.
  3. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  4. Ferreira, Alex Luiz & Leon-Ledesma, Miguel A., 2007. "Does the real interest parity hypothesis hold? Evidence for developed and emerging markets," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 364-382, April.
  5. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
  6. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2003. "China, Hong Kong, and Taiwan: A Quantitative Assessment of Real and Financial Integration," CESifo Working Paper Series 851, CESifo Group Munich.
  7. Alan C. Stockman, 1978. "A Theory of Exchange Rate Determination," UCLA Economics Working Papers 113, UCLA Department of Economics.
  8. Frederic S. Mishkin, 1982. "Are Real Interest Rates Equal Across Countries? An Empirical Investigation of International Parity Conditions," NBER Working Papers 1048, National Bureau of Economic Research, Inc.
  9. Jon Faust & John H. Rogers & Eric Swanson & Jonathan H. Wright, 2003. "Identifying the Effects of Monetary Policy Shocks on Exchange Rates Using High Frequency Data," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1031-1057, 09.
  10. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Zhongxia Jin, 2003. "The Dynamics of Real Interest Rates, Real Exchange Rates and the Balance of Payments in China; 1980-2002," IMF Working Papers 03/67, International Monetary Fund.
  12. 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.
  13. Richard Clarida & Jordi Gali, 1994. "Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?," NBER Working Papers 4658, National Bureau of Economic Research, Inc.
  14. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
  15. Maurice Obstfeld & Alan M. Taylor, 2003. "Globalization and Capital Markets," NBER Chapters, in: Globalization in Historical Perspective, pages 121-188 National Bureau of Economic Research, Inc.
  16. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-22, September.
  17. Perron, P., 1994. "Further Evidence on Breaking Trend Functions in Macroeconomic Variables," Cahiers de recherche 9421, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  18. Shigeru Iwata & Evan Tanner, 2003. "Pick Your Poison; The Exchange Rate Regime and Capital Account Volatility in Emerging Markets," IMF Working Papers 03/92, International Monetary Fund.
  19. Enders, Walter & Lee, Bong-Soo, 1997. "Accounting for real and nominal exchange rate movements in the post-Bretton Woods period," Journal of International Money and Finance, Elsevier, vol. 16(2), pages 233-254, April.
  20. Isaac, Alan G. & de Mel, Suresh, 2001. "The real-interest-differential model after 20 years," Journal of International Money and Finance, Elsevier, vol. 20(4), pages 473-495, August.
  21. Ronald MacDonald & Jun Nagayasu, 2000. "The Long-Run Relationship Between Real Exchange Rates and Real Interest Rate Differentials: A Panel Study," IMF Staff Papers, Palgrave Macmillan, vol. 47(1), pages 5.
  22. John H. Rogers, 1998. "Monetary shocks and real exchange rates," International Finance Discussion Papers 612, Board of Governors of the Federal Reserve System (U.S.).
  23. Elliott, Graham, 1999. "Efficient Tests for a Unit Root When the Initial Observation Is Drawn from Its Unconditional Distribution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 767-83, August.
  24. Breedon, Francis & Henry, Brian & Williams, Geoffrey, 1999. "Long-Term Real Interest Rates: Evidence on the Global Capital Market," Oxford Review of Economic Policy, Oxford University Press, vol. 15(2), pages 128-42, Summer.
  25. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  26. Ronald MacDonald & Luca Antonio Ricci, 2003. "Estimation of the Equilibrium Real Exchange Rate for South Africa," IMF Working Papers 03/44, International Monetary Fund.
  27. Meese, Richard A & Rogoff, Kenneth, 1988. " Was It Real? The Exchange Rate-Interest Differential Relation over the Modern Floating-Rate Period," Journal of Finance, American Finance Association, vol. 43(4), pages 933-48, September.
  28. Faust, Jon, 1998. "The robustness of identified VAR conclusions about money," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 207-244, December.
  29. Edison, Hali J. & Pauls, B. Dianne, 1993. "A re-assessment of the relationship between real exchange rates and real interest rates: 1974-1990," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 165-187, April.
  30. Ronald MacDonald, 1997. "What Determines Real Exchange Rates? The Long and Short of it," IMF Working Papers 97/21, International Monetary Fund.
  31. Robert E. Cumby & Maurice Obstfeld, 1982. "International Interest-Rate and Price-Level Linkages Under Flexible Exchange Rates: A Review of Recent Evidence," NBER Working Papers 0921, National Bureau of Economic Research, Inc.
  32. Jaewoo Lee & Man-Keung Tang, 2003. "Does Productivity Growth Lead to Appreciation of the Real Exchange Rate?," IMF Working Papers 03/154, International Monetary Fund.
  33. Jon Faust, 1998. "The robustness of identified VAR conclusions about money," International Finance Discussion Papers 610, Board of Governors of the Federal Reserve System (U.S.).
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ukc:ukcedp:0407. 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: (Tracey Girling)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.