Real Interest Rates and Home Goods: A Two‐Period Model

Peter Hartley and Albert S. Kyle

The Economic Record, 1988, vol. 64, issue 3, 168-177

Abstract: Using a simple model of a small open economy which includes traded and non‐traded goods and output in two periods, we demonstrate that changes in real interest rates will be associated with changes in real exchange rates. A high real interest rate will encourage consumers to substitute away from present and toward future consumption. To transfer consumption of non‐traded goods intertemporally, intersectoral resource flows are required In the simplest model, this in turn requires opposite movements in the real exchange rate over two periods.

Date: 1988
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