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Real Interest Rates And Real Exchange Rates: Evidence From Indexed Bonds
Author(s) -
Bleaney Michael,
Laxton Douglas
Publication year - 2003
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/1467-9957.00335
Subject(s) - economics , real interest rate , interest rate parity , econometrics , bond , exchange rate , inflation (cosmology) , interest rate , international fisher effect , fisher hypothesis , empirical research , empirical evidence , monetary economics , statistics , mathematics , physics , finance , theoretical physics , philosophy , epistemology
Uncovered interest parity has found little empirical support at short horizons.Subtracting expected inflation differentials from both sides of the uncovered interestparity relationship implies a similar relationship between real interest rate differentials and expected real exchange rate movements. Previous empirical work that has attemptedto test for this relationship has found little empirical support. Using measures of real interest rates derived from indexed bonds, we find that real exchange ratesmove in the direction predicted by real interest rate differentials, and that previousnegative results are probably attributable to errors in estimating inflation expectations.