Structural Breaks in the Real Exchange Rate and Real Interest Rate Relationship

Joseph Byrne and Jun Nagayasu

Working Papers from Business School - Economics, University of Glasgow

Abstract: In this paper we empirically examine the relationship between the real exchange rate and real interest rate differentials using recent econometric methods robust to potential structural breaks. Generally, our study provides evidence of this relationship in the long-run context. More specifically, we first focus on the UK-US relationship, and interestingly find limited evidence of this long-run relationship using traditional methods. But when an approach robust to endogenously determined structural breaks is employed, we find evidence that the real interest rate differential is an important determinant of the real exchange rate. Secondly, in order to investigate the relevance of structural shifts in a more global context, we carry out multiple country analysis. While providing evidence of this long-run relationship, European data suggest that the presence of structural breaks is not very common across countries and is indeed country-specific.

Keywords: Real exchange rate; real interest rate differential; nonstationarity; endogenously determined structural breaks; trace tests (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2008-10
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Structural breaks in the real exchange rate and real interest rate relationship (2010)
Working Paper: Structural Breaks in the Real Exchange Rate and Real Interest Rate Relationship (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2008_29

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