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Real Interest Differentials and Macro Fundamentals: Empirical Estimates
Author(s) -
Blake Robert E.,
Clarida Richard H.
Publication year - 1996
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/(sici)1099-1158(199604)1:2<103::aid-ijfe9>3.0.co;2-q
Subject(s) - economics , interest rate , macro , econometrics , real interest rate , pairwise comparison , generalized method of moments , macroeconomics , financial economics , panel data , mathematics , statistics , computer science , programming language
This paper explores the implications of an open‐economy version of the Lucas asset pricing model for the empirical relationship between pairwise real interest rate differentials and macroeconomic fundamentals for the United States, West Germany, and the United Kingdom from 1974 to 1989. Using Hansen's Generalized Method of Moments, the model's overidentifying restrictions cannot be rejected, while exclusion restrictions on the effect of fluctuations in money and output growth rates on real interest differentials are rejected in the majority of cases. These results are encouraging for those who believe that structural models driven by fundamental macroeconomic variables can help explain price determination in international financial markets.