A new interpretation of the exchange rate-yield diffferential nexus

Jerry Coakley, Andrew Wood, Ana Maria Fuertes*

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review


    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 languageEnglish
    Pages (from-to)201-218
    Number of pages18
    JournalInternational Journal of Finance and Economics
    Issue number3
    Publication statusPublished - Jul 2004


    • Financial market intergration
    • Nonstationary panels
    • Permament shocks


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