PPP and the Real Exchange Rate - Real Interest Rate Differential Puzzle Revisited: Evidence from Non-Stationary Panel Data

2001 ◽  
Author(s):  
Georgios E. Chortareas ◽  
Rebecca L. Driver
Keyword(s):  
Exchange Rate ◽  
Panel Data ◽  
Interest Rate ◽  
Real Exchange Rate ◽  
Real Interest Rate ◽  
The Real

scholarly journals Asymmetries in the euro area and TFP growth: evidence from three major European economies

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Alessandro Bellocchi ◽  
Edgar Sanchez Carrera ◽  
Giuseppe Travaglini
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Real Exchange Rate ◽  
Real Interest Rate ◽  
Positive Relationship ◽  
Content Type ◽  
The Real ◽  
Long Run ◽  
Capital Misallocation ◽  
European Economies

PurposeIn this paper, the authors study the long-run determinants of total factor productivity (TFP) in three major European economies over the period 1983–2017, namely Germany, France and Italy.Design/methodology/approachThe authors focus on the capital misallocation effects, scale effects and labor misallocation effects. To this end, the authors study how real interest rate shocks, real exchange rate shocks, real wage shocks and changes in labor regulation affected TFP in major European countries over the last decades. The authors employ a theoretical and an empirical model to investigate the issue. The empirical results are obtained using a VAR model for estimation.FindingsA stripped-down model of labor market in open economy with technology progress allows to identify the relevant variables affecting TFP. On the empirical ground, the authors find a positive relationship between TFP and real interest rate in the long run. Importantly, the authors detect a positive relationship between TFP and real exchange rate. Further, the authors show that the TFP can respond positively to a stricter labor market regulation and to a higher real compensation per employee. The results provide support to the idea that TFP has a positive relation with prices in the long run, while it may be biased along the cycle because of price rigidity.Research limitations/implicationsThe present model is stylized and may not capture all of the details of reality. The analysis should be extended to a larger number of countries. Technology progress could be proxied using different variables, as the R&D expenditure or the number of patents. Micro data, for specific sectors and industries, can improve the quality of the empirical investigation.Practical implicationsMainly the authors find that TFP has a positive relationship with price changes in the long run, while it may be biased along the cycle because of price stickiness. Capital misallocation and labor misallocation can negatively affect TFP. Thus, the observed divergences in European TFP can be traced back to the misallocation effects attributable to the decrease of real interest rate and real wages, together with the raising labor flexibility. Mainly, the authors detect a positive long-run relationship between TFP and real exchange rate. This outcome strengthens the supply-side view of the relationship between productivity and real exchange rate.Social implicationsThe authors believe that the present setup can be helpful to reflect critically on the nodes at the core of the productivity slowdown and asymmetries in the eurozone. The aim is to implement renewed policies in order to favor economic growth, convergence and stability in the euro area.Originality/valueThis research addresses the issue of asymmetries among European economies by focusing on the role played by real prices in the long run. Traditionally, the dynamics of TFP have been attributed only to technological components, human capital and knowledge. This work shows that the dynamics of prices such as the real interest rate, the real exchange rate and the real wage can also influence the technological process by pushing the production system toward choices that are not always optimal for economic growth. An interesting result of this research concerns the positive relationship between real exchange rates and TFP in the long term, evidence of an important supply-side effect on the technological process.

scholarly journals The Long-run Relationship between Real Exchange Rate and Real Interest Rate in Asian Countries: An Application of Panel Cointegration

2001 ◽  
Vol 40 (4II) ◽  
pp. 577-602 ◽  
Author(s):  
Shaista Alam ◽  
Muhammad Sabihuddin Butt ◽  
Azhar Iqbal
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Real Interest Rate ◽  
Real Exchange Rates ◽  
Panel Cointegration ◽  
The Real ◽  
Long Run ◽  
Interest Rate Differentials

The role of exchange rate policy in economic development has been the subject of much debate and controversy in the development literature. Interest rates and exchange rates are usually viewed as important in the transmission of monetary impulses to the real economy. In the short run the standard view of academics and policy-makers is that a monetary expansion lowers the interest rate and rises the exchange rate, with these price changes then affecting the level and composition of aggregate demand. Frequently, these influences are described as the liquidity effects of monetary expansion, viewed as the joint effect of providing larger quantities of money to the private sector. Popular theories of exchange-rate determination also predict a link between real exchange rates and real interest rate differentials. These theories combine the uncovered interest parity relationship with the assumption that the real exchange rate deviates from its long-run level only temporarily. Under these assumptions, shocks to the real exchange rate—which are often viewed as caused by shocks to monetary policy—are expected to reverse themselves over time. This study investigates the long-run relationship between real exchange rates and real interest rate differentials using recently developed panel cointegration technique. Although this kind of relationship has been studied by a number of researchers,1 very little evidence in support of the relationship has been reported in the case of developing countries. For example, Meese and Rogoff (1988) and Edison and Pauls (1993), among others, used the Engle-Granger cointegration method and fail to establish a clear long-run relationship in their analysis.

scholarly journals Loom of Symmetric Pass-Through

Economies ◽  
2019 ◽  
Vol 7 (1) ◽  
pp. 11
Author(s):  
Afsin Sahin
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Real Exchange Rate ◽  
Stock Prices ◽  
Real Interest Rate ◽  
Deposit Rate ◽  
The Real ◽  
Lending Rate ◽  
Lending Rates ◽  
Pass Through

This paper analyzes the effects of the real policy interest rate on the banking sector lending rate, the deposit rate, real stock prices, and the real exchange rate using the Engle Granger cointegration method (EG), the vector error-correction model (VECM), and the nonlinear vector error-correction model (NVECM) with monthly Turkish data over the period January 2002–April 2018. (1) EG results indicate bivariate cointegration relationships between the real interest rate, lending rates, and the deposit rate. The real interest rate increases all lending rates, mainly the housing rate. However, the long-run coefficient for the real exchange rate is not statistically significant. The pass-through is higher for the deposit rate than for lending rates. Moreoever, real stock prices shrink substantially where the finance sector has been affected the most. (2) VECM results indicate a cointegration relationship between all the variables except for the real exchange rate, which has a statistically non-significant pass-through coefficient. The real interest rate has a noteworthy long-run positive effect on the housing loans lending rate compared to others. The affirmative effect on real stock prices is the highest for the technology sector. The short-run effect of the real interest rate on lending rates, real stock prices and the real exchange rate are statistically non-significant except for the overall stock price index, and the vehicle loans lending rate which has a higher coefficient than the deposit rate. (3) NVECM results allow testing of eleven hypotheses and highlight the symmetric relationship and the valid pass-through effect, and reject the strong exogeneity assumption for all variables.

scholarly journals THE REAL EXCHANGE RATE DETERMINATION: EMPIRICAL EVIDENCE FROM MALAYSIA

2014 ◽  
Vol 59 (02) ◽  
pp. 1450016
Author(s):  
WONG HOCK TSEN
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Real Exchange Rate ◽  
Real Interest Rate ◽  
Oil Price ◽  
Exchange Rate Determination ◽  
The Real ◽  
Distributed Lag ◽  
Autoregressive Distributed Lag ◽  
Productivity Differential

This study examines the real exchange rate determination in Malaysia. The result of the autoregressive distributed lag approach shows that an increase in the real interest rate differential, productivity differential, the real oil price or reserve differential will lead to an appreciation of the real exchange rate in the long run. The real oil price and reserve differential are important in the real exchange rate determination. The dynamic ordinary least squares (DOLS) estimator shows about the same conclusion of the autoregressive distributed lag approach. The result of the generalized forecast error variance decomposition shows that the real interest rate differential, productivity differential, the real oil price and reserve differential are generally important to the real exchange rate determination.

Carry Trade, Exchange Rates, and the Balance-of-Payments

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Nelson H. Barbosa-Filho
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Real Exchange Rate ◽  
Foreign Debt ◽  
Balance Of Payments ◽  
Forward Rate ◽  
Spot Rate ◽  
Financial Constraint ◽  
Carry Trade ◽  
The Real

Abstract This paper presents a partial equilibrium model that integrates interest rate arbitrage with the balance-of-payments constraint to determine the real exchange rate. The sequential logic is the following: (i) carry-trade determines the term premium, with the spot rate showing greater volatility than the forward rate, (ii) uncovered interest rate parity determines the spot rate based on the real exchange rate consistent with a financial constraint, defined as a stable ratio of foreign reserves to foreign debt; and (iii) the trade balance consistent with the financial constraint determines the long-run real exchange rate for a given ratio of domestic to foreign income.

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