Does the world real interest rate affect the real exchange rate? The South East Asian experience

Karine Gente () and Miguel Leon-Ledesma ()

Journal of International Trade & Economic Development, 2006, vol. 15, issue 4, pages 441-467

Abstract: We analyze the consequences of US real interest rate rises on the real exchange rate (RER) in a two-good overlapping generations model of a semi-small open economy. The equilibrium RER depreciates (appreciates) when the world interest rate increases in a debtor (creditor) country. We then study empirically the reaction of the RER in a set of South East Asian (SEA) countries to shocks in US real interest rates. The results support the conclusions of the theory model at least for Singapore, Thailand and South Korea during the period 1980 -- 2001. This points towards world interest rate shocks as possible trigger factors for exchange rate crises during the adjustment process towards the new equilibrium.

Keywords: Real exchange rate; overlapping generations; world interest rate shock (search for similar items in EconPapers)
Date: 2006
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Working Paper: Does the World Real Interest Rate Affect the Real Exchange Rate? The South East Asian Experience (2004)
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