International Real Rate Research Articles

Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions

We examine the mean-reverting properties of real exchange rates, by comparing the unit root properties of a group of international real exchange rates with two groups of intra-national real exchange rates. Strikingly, we find that while the international real rates taken as a group are mean-reverting, the intra-national rates are not. This is consistent with the view that while monetary shocks may be mean-reverting over the medium-term, underlying real factors do generate long-term trends in real exchange rates.

Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions

We examine the mean-reverting properties of real exchange rates, by comparing the unit root properties of a group of international real exchange rates with two groups of intra-national real exchange rates. Strikingly, we find that while the international real rates taken as a group are mean-reverting, the intra-national rates are not. This is consistent with the view that while monetary shocks may be mean-reverting over the medium-term, underlying real factors do generate long-term trends in real exchange rates.

Deviations of Exchange Rates From Purchasing Power Parity: A Story Featuring Two Monetary Unions

We examine the mean-reverting properties of real exchange rates, by comparing the unit root properties of a group of international real exchange rates with two groups of intra-national real exchange rates. Strikingly, we find that while the international real rates taken as a group appear mean-reverting, the intra-national rates are not. This is consistent with the view that while monetary shocks may be mean-reverting over the medium term, underlying real factors do generate long-term trends in real exchange rates.

Real interest rate parity new measures and tests

International financial theory implies that for international comparisons, the appropriate measure of the real interest rate is one defined in terms of traded goods prices alone. New measures of the real interest rate are constructed using changes in price indexes for traded goods as deflators. These new measures are tested for international real rate equality and the results are compared to those of similar tests using measures based on the change in the CPI and the WPI. There are important differences between the traded goods real rate measures and those based on either the CPI or the WPI. However, in general, the tests support the hypothesis that the real interest rate is approximately measured in terms of traded goods. (JEL F30)

International expected real interest rates: New tests of the parity hypothesis and U.S. fiscal policy effects

This paper investigates the links among expected real interest rates across countries and also those between international expected real interest rates and U.S. fiscal policy. We analyze the cross-sectional mean of international ex-post real interest rates as an estimator for the mean international expected real interest rate. Our results strongly reject the international expected real interest rate parity hypothesis; reveal that U.S. budget deficits have no independent effects on international real rates given the impact of U.S. government defense spending; and suggest that forces other than U.S. fiscal policy account for the post-1980 rise in international real rates.

On the constancy of the international real rate of interest

This paper develops an alternative method of deriving the ex-ante real rate of interest. Given assumptions regarding capital mobility and PPP, it is shown that in equilibrium the ex-ante real rate will be equalized across countries. Using cross-sectional regression techniques, this real rate can be estimated at each moment in time. Hence, it is possible to develop a time series of estimated real rates derived from cross-sectional regressions. This estimated real rate series is then used in time-series tests of the Fisher equation for the U.S.