Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/76395
Authors: 
Hoffmann, Mathias
MacDonald, Ronald
Year of Publication: 
2003
Series/Report no.: 
CESifo Working Paper 894
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.
Subjects: 
real exchange rates
real interest rates
cointegration
JEL: 
E43
F31
F41
Document Type: 
Working Paper

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