The Dollar and Real Interest Rates

John Campbell and Richard Clarida

Scholarly Articles from Harvard University Department of Economics

Abstract: In this paper, we investigate the link between the real foreign exchange value of the dollar and real interest rates since 1979. We argue that it is important to consider the possibility that real exchange rate movements reflect movements of the long-run equilibrium exchange rate as well as real interest differentials. We use a state-space approach to estimate the importance of shifts in the long-run equilibrium exchange rate, the persistence of the ex ante short-term real interest differential, and the effect of this differential on the exchange rate. Using U.S., Canadian, British, German and Japanese data from October 1979 to March 1986, we find that movements in the dollar real exchange rate have been dominated by unanticipated shifts in the expected long-run real exchange rate. Ex ante real interest differentials have not been persistent or variable enough to account for a major part of exchange rate variation. We use Mussa's (1984) rational expectations model of the real exchange rate and the current account to interpret our results.

Date: 1987
References: Add references at CitEc
Citations: View citations in EconPapers (104)

Published in Carnegie-Rochester Conference Series on Public Policy

Downloads: (external link)
http://dash.harvard.edu/bitstream/handle/1/3221495 ... llarrealinterest.pdf (application/pdf)

Related works:
Journal Article: The dollar and real interest rates (1987)
Working Paper: The Dollar and Real Interest Rates (1987)
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:hrv:faseco:3221495

Access Statistics for this paper

More papers in Scholarly Articles from Harvard University Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Office for Scholarly Communication ().