Long Run Relationship between Real Exchange Rate and Real Interest Rate Differentials: The Cointegration Approach

39 Pages Posted: 13 Dec 2006

See all articles by Nilanjan Patra

Nilanjan Patra

Jawaharlal Nehru University - Centre for Economic Studies and Planning

Date Written: 2004

Abstract

Despite the centrality of the theoretical relationship between real exchange rates and real interest rates differential in open economy macroeconomics, its empirical evidence, particularly when cointegration methods are used, is rather mixed. The study uses IFS, IMF data for India and US for the period of 1993:M04 to 2003:M09. It employs both Engle-Granger and Johansen tests for presence of cointegration. However, it could not found empirical support in favour of the above relationship. The result is robust for different measures of real interest rate differentials.

Keywords: Real Exchange rate, Real Interest rate, Cointegration

JEL Classification: C22, E49, F31

Suggested Citation

Patra, Nilanjan, Long Run Relationship between Real Exchange Rate and Real Interest Rate Differentials: The Cointegration Approach (2004). Available at SSRN: https://ssrn.com/abstract=951153 or http://dx.doi.org/10.2139/ssrn.951153

Nilanjan Patra (Contact Author)

Jawaharlal Nehru University - Centre for Economic Studies and Planning ( email )

JNU Campus
New Delhi, Delhi 110067
India

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