Abstract
We propose an alternative model and method to reconcile the puzzling feature in the relationship between the real exchange rate and real interest rate differentials. Our simple two-country model with preset prices, along with firms' misperception about the future exchange rate, implies that the real exchange rate follows an ARIMA(0,1,p) process. This allows us to compute the exact Beveridge-Nelson decomposition, which is a model-consistent decomposition. In accordance with our model, unit roots in the real exchange rates are found; and statistical inference is partially found to be affirmative regarding the link between the real exchange rate detrended by the Beveridge-Nelson decomposition and corresponding real interest differentials.
| Original language | English |
|---|---|
| Pages (from-to) | 968-987 |
| Number of pages | 20 |
| Journal | Economic Inquiry |
| Volume | 50 |
| Issue number | 4 |
| DOIs | |
| Publication status | Published - 2012 Oct |
| Externally published | Yes |
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ASJC Scopus subject areas
- Economics and Econometrics
- Business, Management and Accounting(all)
Cite this
The real exchange rate and real interest differentials : The role of the trend-cycle decomposition. / Wada, Tatsuma.
In: Economic Inquiry, Vol. 50, No. 4, 10.2012, p. 968-987.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - The real exchange rate and real interest differentials
T2 - The role of the trend-cycle decomposition
AU - Wada, Tatsuma
PY - 2012/10
Y1 - 2012/10
N2 - We propose an alternative model and method to reconcile the puzzling feature in the relationship between the real exchange rate and real interest rate differentials. Our simple two-country model with preset prices, along with firms' misperception about the future exchange rate, implies that the real exchange rate follows an ARIMA(0,1,p) process. This allows us to compute the exact Beveridge-Nelson decomposition, which is a model-consistent decomposition. In accordance with our model, unit roots in the real exchange rates are found; and statistical inference is partially found to be affirmative regarding the link between the real exchange rate detrended by the Beveridge-Nelson decomposition and corresponding real interest differentials.
AB - We propose an alternative model and method to reconcile the puzzling feature in the relationship between the real exchange rate and real interest rate differentials. Our simple two-country model with preset prices, along with firms' misperception about the future exchange rate, implies that the real exchange rate follows an ARIMA(0,1,p) process. This allows us to compute the exact Beveridge-Nelson decomposition, which is a model-consistent decomposition. In accordance with our model, unit roots in the real exchange rates are found; and statistical inference is partially found to be affirmative regarding the link between the real exchange rate detrended by the Beveridge-Nelson decomposition and corresponding real interest differentials.
UR - http://www.scopus.com/inward/record.url?scp=84867230608&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84867230608&partnerID=8YFLogxK
U2 - 10.1111/j.1465-7295.2011.00387.x
DO - 10.1111/j.1465-7295.2011.00387.x
M3 - Article
AN - SCOPUS:84867230608
VL - 50
SP - 968
EP - 987
JO - Economic Inquiry
JF - Economic Inquiry
SN - 0095-2583
IS - 4
ER -