Structural breaks in the real exchange rate and real interest rate relationship

Byrne, J.P. and Nagayasu, J. (2010) Structural breaks in the real exchange rate and real interest rate relationship. Global Finance Journal, 21(2), pp. 138-151. (doi:10.1016/j.gfj.2010.06.002)

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In this paper we empirically examine the relationship between the real exchange rate and the real interest rate differential using recent econometric methods robust to potential structural breaks. Generally, our study provides evidence of this relationship in the long-run context. More specifically, we first focus on the UK–US relationship, and interestingly find limited evidence of this long-run relationship using traditional methods. But when an approach robust to structural breaks is employed, we find evidence that the real interest rate differential is an important determinant of the real exchange rate. Secondly, in order to investigate the relevance of structural shifts in a more global context, we replicate our analysis for a number of other exchange rates. While providing evidence of this long-run relationship, European data suggest that the presence of structural breaks is not very common across countries and is indeed country-specific.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Byrne, Dr Joseph
Authors: Byrne, J.P., and Nagayasu, J.
Subjects:H Social Sciences > HB Economic Theory
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Global Finance Journal
Publisher:Elsevier BV, North-Holland
ISSN (Online):1873-5665
Published Online:06 July 2010

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