Do We Need Multi-Country Models to Explain Exchange Rate and Interest Rate Dynamics?

25 Pages Posted: 30 Mar 2000

See all articles by Robert J. Hodrick

Robert J. Hodrick

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Maria Vassalou

Centre for Economic Policy Research (CEPR)

Date Written: December 13, 1999

Abstract

This paper examines characterizations of exchange rate and short-term interest rate dynamics, based on the implications of multi-country versions of the Cox, Ingersoll, and Ross (1985) class of term structure models. The countries considered are the US, Germany, Japan, and the UK. Our tests reveal that multi-country models are, in some cases, better able to explain the dynamics of exchange rates and interest rates than two-country and single-country models respectively. This is particularly true for the Japanese interest rate as well as the rate of appreciation of the Deutsche mark relative to the US dollar. Our inference is conducted using the small-sample distributions of test statistics, in addition to their asymptotic distributions.

JEL Classification: E31, F43, G12

Suggested Citation

Hodrick, Robert J. and Vassalou, Maria, Do We Need Multi-Country Models to Explain Exchange Rate and Interest Rate Dynamics? (December 13, 1999). Available at SSRN: https://ssrn.com/abstract=212188 or http://dx.doi.org/10.2139/ssrn.212188

Robert J. Hodrick

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

365 Fifth Avenue, 5th Floor
New York, NY 10016-4309
United States

Maria Vassalou (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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