Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/78088 
Year of Publication: 
2000
Series/Report no.: 
CFS Working Paper No. 2000/08
Publisher: 
Goethe University Frankfurt, Center for Financial Studies (CFS), Frankfurt a. M.
Abstract: 
This paper examines the interaction of G7 real exchange rates with real output and interest rate differentials. Using cointegration methods, we generally find a link between the real exchange rate and the real interest differential. This finding contrasts with the majority of the extant research on the real exchange rate - real interest rate link. We identify a new measure of the equilibrium exchange rate in terms of the permanent component of the real exchange rate that is consistent with the dynamic equilibrium given by the cointegration relation. Furthermore, the presence of cointegration also allows us to identify real, nominal and transitory disturbances with only minimal identifying restrictions. Our findings suggest that persistent deviations of real exchange rates from their equilibrium value can have feedback effects on the underlying fundamentals, hence altering the equilibrium exchange rate itself. This has important implications for the persistence measures of real exchange rates that are reported elsewhere in the literature.
Subjects: 
Equilibrium Exchange Rates
Cointegration
Permanent and Transitory Decomposition
JEL: 
F31
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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