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Real Interest Rates and Home Goods: A Two‐Period Model *
Author(s) -
HARTLEY PETER R.,
KYLE ALBERT S.
Publication year - 1988
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.1988.tb02055.x
Subject(s) - consumption (sociology) , economics , interest rate , real interest rate , simple (philosophy) , microeconomics , transfer (computing) , exchange rate , monetary economics , open economy , resource (disambiguation) , computer science , computer network , social science , philosophy , epistemology , sociology , parallel computing
Using a simple model of a small open economy which includes traded and non‐traded goods and output in two periods, we demonstrate that changes in real interest rates will be associated with changes in real exchange rates. A high real interest rate will encourage consumers to substitute away from present and toward future consumption. To transfer consumption of non‐traded goods intertemporally, intersectoral resource flows are required In the simplest model, this in turn requires opposite movements in the real exchange rate over two periods.