A real differential view of equilibrium real exchange rates and misalignments

  • This paper examines the interaction of G7 real exchange rates with real output and interest rate differentials. Using cointegration methods, we generally find a link between the real exchange rate and the real interest differential. This finding contrasts with the majority of the extant research on the real exchange rate - real interest rate link. We identify a new measure of the equilibrium exchange rate in terms of the permanent component of the real exchange rate that is consistent with the dynamic equilibrium given by the cointegration relation. Furthermore, the presence of cointegration also allows us to identify real, nominal and transitory disturbances with only minimal identifying restrictions. Our findings suggest that persistent deviations of real exchange rates from their equilibrium value can have feedback effects on the underlying fundamentals, hence altering the equilibrium exchange rate itself. This has important implications for the persistence measures of real exchange rates that are reported elsewhere in the literature.

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Author:Mathias Hoffmann, Ronald MacDonald
Parent Title (German):Institut für Kapitalmarktforschung (Frankfurt am Main): CFS working paper series ; No. 2000,08
Series (Serial Number):CFS working paper series (2000, 08)
Document Type:Working Paper
Year of Completion:2000
Year of first Publication:2000
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2005/06/13
Tag:Cointegration; Equilibrium Exchange Rates; Permanent and Transitory Decomposition
GND Keyword:G-7-Staaten; Kaufkraftparität; Kaufkraftvergleich; Konjunktur; Zinsstruktur; Zinsstrukturtheorie; Kointegration; Geschichte 1978-1997
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht