A Re-examination of the Link between Real Exchange Rates and Real Interest Rate Differentials

Mathias Hoffmann and Ronald MacDonald

No 894, CESifo Working Paper Series from CESifo

Abstract: The real exchange rate - real interest rate (RERI) relationship is central to most open economy macroeconomic models. However, empirical support for the relationship, especially when cointegrationbased methods are used, is rather weak. In this paper we reinvestigate the RERI relationship using bilateral real exchange rate data spanning the period 1978 to 1997. We first clarify the logic of applying cointegration methods to the RERI and propose an alternative way of testing the relationship. We demonstrate that the failure of earlier analyses to detect a stationary real interest rate is largely due to the low power of the tests employed.

Keywords: real exchange rates; real interest rates; cointegration (search for similar items in EconPapers)
JEL-codes: E43 F31 F41 (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo_wp894.pdf (application/pdf)

Related works:
Working Paper: A Re-examination of the link between Real Exchange Rates and Real Interest Rate Differentials (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_894

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().