Real Interest Rates and Real Exchange Rates: Evidence from Indexed Bonds

13 Pages Posted: 13 Mar 2003

See all articles by Michael Bleaney

Michael Bleaney

University of Nottingham - School of Economics

Douglas Laxton

International Monetary Fund (IMF) - Research Department

Abstract

Uncovered interest parity has found little empirical support at short horizons. Subtracting expected inflation differentials from both sides of the uncovered interest parity relationship implies a similar relationship between real interest rate differentials and expected real exchange rate movements. Previous empirical work that has attempted to test for this relationship has found little empirical support. Using measures of real interest rates derived from indexed bonds, we find that real exchange rates move in the direction predicted by real interest rate differentials, and that previous negative results are probably attributable to errors in estimating inflation expectations.

Suggested Citation

Bleaney, Michael and Laxton, Douglas, Real Interest Rates and Real Exchange Rates: Evidence from Indexed Bonds. Available at SSRN: https://ssrn.com/abstract=381652

Michael Bleaney (Contact Author)

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom
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+44 0 115 951 5141 (Fax)

Douglas Laxton

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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