International real interest rate differentials, purchasing power parity and the behaviour of real exchange rates: The resolution of a conundrum

International Journal of Finance and Economics

Volumn 9, Issue 1, 2004, Pages 15-23

  Taylor, Mark P ^a   Sarno, Lucio ^a  

^a UNIVERSITY OF WARWICK   (United Kingdom)

Author keywords

Purchasing power parity; Random walk; Real exchange rate; Real interest rate differential

Indexed keywords

GLOBAL ECONOMY; INTEREST RATE; PURCHASING POWER PARITY; REAL EXCHANGE RATE;

EID: 1142268777     PISSN: 10769307     EISSN: None     Source Type: Journal    
DOI: 10.1002/ijfe.232     Document Type: Article

References (37)

1. Abuaf N, Jorion P. 1990. Purchasing power parity in the long run. Journal of Finance 45: 157-174.
2. Adler M, Lehmann B. 1983. Deviations from purchasing power parity in the long run. Journal of Finance 38: 1471-1487.
3. Breuer JB. 1994. An assessment of the evidence on purchasing power parity. In Estimating Equilibrium Exchange Rates, Williamson J (ed.). Institute for International Economics: Washington, DC.
4. Cheung YW, Lai KS. 1993. Long-run purchasing power parity during the recent float. Journal of International Economics 34: 181-192.
5. Cheung YW, Lai KS. 2000a. On cross-country differences in the persistence of real exchange rates. Journal of International Economics 50: 375-397.
6. Cheung YW, Lai KS. 2000b. On the purchasing power parity puzzle. Journal of International Economics 52: 321-330.
7. Clarida RH, Taylor MP. 1997. The term structure of forward exchange premiums and the forecastability of spot exchange rates: correcting the errors. Review of Economics and Statistics 79: 353-361.
8. Engle RF, Granger CWJ. 1987. Co-integration and error correction: representation, estimation, and testing. Econometrica 55: 251-276.
9. Frankel JA. 1979. On the mark: a theory of floating exchange rates based on real interest differentials. American Economic Review 69: 610-622.
10. Frankel JA. 1981. On the mark: reply. American Economic Review 71: 1075-1082.
11. Frankel JA. 1993. Zen and the art of modern macroeconomics: the search for perfect nothingness. In On Exchange Rates, Frankel JA (ed.). MIT Press: Cambridge, MA.
12. Frankel JA, Rose AK. 1995. Empirical research on nominal exchange rates. In Handbook of International Economics, Vol. III, Grossman G, Rogoff K (eds). Elsevier Science: Amsterdam: 1689-1729.
13. Frenkel JA. 1976. A monetary approach to the exchange rate: doctrinal aspects and empirical evidence. Scandinavian Journal of Economics 78: 200-224.
14. Froot KA, Rogoff K. 1995. Perspectives on PPP and long-run real exchange rates. In Handbook of International Economics, Rogoff K, Grossman G (eds). North-Holland: Amsterdam.
15. Granger CWJ, Morris MJ. 1976. Time series modelling and interpretation. Journal of the Royal Statistical Society, Series A 139: 246-257.
16. Harvey AC. 1981. Time Series Models. Philip Allan: Hemel Hempstead.
17. Hodrick RJ. 1987. The Empirical Evidence on the Efficiency of Forward and Futures Foreign Exchange Markets. Harwood: London.
18. Jorion P, Sweeney RJ. 1996. Mean reversion in real exchange rates: evidence and implications for forecasting. Journal of International Money and Finance 15: 535-550.
19. Lothian JR, Taylor MP. 1996. Real exchange rate behaviour: the recent float from the perspective of the past two centuries. Journal of Political Economy 104: 488-510.
20. MacDonald R. 1995. Long-run exchange rate modeling: a survey of the recent evidence. International Monetary Fund Staff Papers 42: 437-489.
21. MacDonald R, Taylor MP. 1992a. Exchange rate economics: a survey. International Monetary Fund Staff Papers 39: 1-57.
22. MacDonald R, Taylor MP (eds). 1992b. Critical Writings in Exchange Rate Economics, Vol. 2. Edward Elgar: Cheltenham.
23. Mark NC. 1985a. A note on international real interest rate differentials. Review of Economics and Statistics 67: 681-684.
24. Mark NC. 1985b. Some evidence on the international inequality of real interest rates. Journal of International Money and Finance 4: 189-208.
25. Mark NC. 1995. Exchange rates and fundamentals: evidence on long-horizon predictability. American Economic Review 85: 201-218.
26. Mark NC. 2001. International Macroeconomics and Finance: Theory and Empirical Methods. Blackwell Publishers: London.
27. Mark NC, Choi DY. 1997. Real exchange-rate prediction over long horizons. Journal of International Economics 43: 29-60.
28. Mark NC, Sul D. 2001. Nominal exchange rates and monetary fundamentals: evidence from a small post-Bretton Woods panel. Journal of International Economics 53: 29-52.
29. Marston R. 1995. International Financial Integration: A Study of Interest Rate Differentials Between the Major Industrial Countries. Cambridge University Press: Cambridge.
30. Mishkin FS. 1984. Are real interest rates equal across countries? An empirical investigation of international parity conditions. Journal of Finance 39: 1345-1357.
31. Mussa M. 1979. Empirical regularities in the behavior of exchange rates and theories of the foreign exchange market. Carnegie-Rochester Conference Series on Public Policy 11: 9-57.
32. Rogoff K. 1996. The purchasing power parity puzzle. Journal of Economic Literature 34: 647-668.
33. Roll R. 1979. Violations of purchasing power parity and their implications for efficient international commodity markets. In International Finance and Trade, Vol. 1, Marshall S, Szego GP (eds). Ballinger: Cambridge, MA: 133-176. [Reprinted in MacDonald R, Taylor MP (eds). 1992b, pp. 349-392.]
34. Sarno L, Taylor MP. 2002. Purchasing power parity and the real exchange rate. International Monetary Fund Staff Papers 49: 65-105.
35. Taylor MP. 1995. The economics of exchange rates. Journal of Economic Literature 33: 13-47.
36. Taylor MP, Sarno L. 1998. The behaviour of real exchange rates during the post-Bretton Woods period. Journal of International Economics 46: 281-312.
37. Taylor MP, Peel DA, Sarno L. 2001. Nonlinear mean-reversion in real exchange rates: towards a solution to the purchasing power parity puzzles. International Economic Review 42: 1015-1045.