Abstract
Empirical studies have had difficulty in establishing the long-run relationship between real exchange rates and real yield differentials predicted by sticky price exchange rate models. We revisit this issue in a nonstationary panel regression framework. This facilitates estimation of a long-run parameter even when the underlying relationship is subject to permanent shocks or the variables do not cointegrate. The slope coefficient estimate from a sample of 23 industrialized countries 1973M1-1998M12 has the correct sign and is statistically significant for both short and longterm yields. These results support fundamentals-based models of exchange rate behaviour while permitting real factors to play a role. Moreover, they indicate that capital markets integration is more advanced than hitherto believed.
Original language | English |
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Pages (from-to) | 201-218 |
Number of pages | 18 |
Journal | International Journal of Finance and Economics |
Volume | 9 |
Issue number | 3 |
DOIs | |
Publication status | Published - Jul 2004 |
Keywords
- Financial market intergration
- Nonstationary panels
- Permament shocks