The Long-Run Relationship between Real Exchange Rates and Real Interest Rate Differentials: A Panel Study

12 Pages Posted: 12 Feb 2006

See all articles by Ronald MacDonald

Ronald MacDonald

University of Strathclyde in Glasgow - Department of Economics; Government of New Zealand - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Jun Nagayasu

International Monetary Fund (IMF)

Date Written: March 1999

Abstract

This paper empirically examines the long-run relationship between real exchange rates and real interest rate differentials over the recent floating exchange rate period, using a panel cointegration method, with data for a set of industrialized countries. The paper finds evidence of statistically significant long-run relationships and plausible point estimates, which contrasts with much existing evidence. The failure of others to establish such relationships may reflect the estimation method they use rather than any inherent deficiency of the fundamentals-based models.

Keywords: Real exchange rates, real interest rates, panel cointegration

JEL Classification: F31

Suggested Citation

MacDonald, Ronald R. and Nagayasu, Jun, The Long-Run Relationship between Real Exchange Rates and Real Interest Rate Differentials: A Panel Study (March 1999). IMF Working Paper No. 99/37, Available at SSRN: https://ssrn.com/abstract=880564

Ronald R. MacDonald (Contact Author)

University of Strathclyde in Glasgow - Department of Economics ( email )

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Government of New Zealand - Department of Economics

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Jun Nagayasu

International Monetary Fund (IMF) ( email )

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