Alternative Approaches to Real Exchange Rates and Real Interest Rates: Three Up and Three Down
Abstract
This paper examines the relationship between real exchange rates and real interest rates using three different approaches across four currencies and two horizons with 20 years of data. Each approach gives some encouragement that this relationship might hold, but each approach also encounters problems establishing the form or usefulness of the relationship. On balance, this paper contributes to the literature by finding more encouraging results than in earlier studies, but it still remains to be demonstrated that the real exchange rate-real interest rate relationship is the linchpin to explaining exchange rate movements.
Abstract This paper examines the relationship between real exchange rates and real interest rates using three different approaches across four currencies and two horizons with 20 years of data. Each approach gives some encouragement that this relationship might hold, but each approach also encounters problems establishing the form or usefulness of the relationship. On balance, this paper contributes to the literature by finding more encouraging results than in earlier studies, but it still remains to be demonstrated that the real exchange rate-real interest rate relationship is the linchpin to explaining exchange rate movements.
Cite this document
Hali J. Edison and William R. Melick (1995). Alternative Approaches to Real Exchange Rates and Real Interest Rates: Three Up and Three Down (IFDP 1995-518). Board of Governors of the Federal Reserve System, International Finance Discussion Papers. https://whenthefedspeaks.com/doc/ifdp_1995-518
@techreport{wtfs_ifdp_1995_518,
author = {Hali J. Edison and William R. Melick},
title = {Alternative Approaches to Real Exchange Rates and Real Interest Rates: Three Up and Three Down},
type = {International Finance Discussion Papers},
number = {1995-518},
institution = {Board of Governors of the Federal Reserve System},
year = {1995},
url = {https://whenthefedspeaks.com/doc/ifdp_1995-518},
abstract = {This paper examines the relationship between real exchange rates and real interest rates using three different approaches across four currencies and two horizons with 20 years of data. Each approach gives some encouragement that this relationship might hold, but each approach also encounters problems establishing the form or usefulness of the relationship. On balance, this paper contributes to the literature by finding more encouraging results than in earlier studies, but it still remains to be demonstrated that the real exchange rate-real interest rate relationship is the linchpin to explaining exchange rate movements.},
}