The Real Interest Differential Model after Twenty Years

Alan G Isaac () and Suresh de Mel
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Suresh de Mel: American University

International Finance from EconWPA

Abstract: It has been twenty years since Frankel (1979) offered the classic empirical support for the Dornbusch (1976) overshooting model against the simple monetary approach model, and almost that long since Driskill and Sheffrin (1981) uncovered some important inconsistencies between Frankel’s theoretical framework and his empirical implementation. Frankel’s RID model nevertheless spawned a huge lit-erature in international monetary economics. In this paper, we replicate and update the Frankel (1979) and Driskill and Sheffrin (1981) results, in order to offer a retrospective and a reëvaluation of this lit-erature. We also explain why the model estimated by Driskill and Sheffrin (1981) cannot underpin a critique of Frankel (1979), a point which is not generally recognized. While specialists in international finance generally recognize that the initial promise of Frankel’s research has not been kept, we believe that many will be surprised nevertheless by our stark findings. JEL: F31, F40, C13

Keywords: exchange rates; real interest differential model (search for similar items in EconPapers)
JEL-codes: F31 F40 C13 (search for similar items in EconPapers)
Date: 1999-07-29
Note: Type of Document - PDF; prepared on PC with TrueTeX and Acrobat 4; to print on HP; pages: 27 ; figures: included. Comments appreciated.
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpif:9907002

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