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Real Interest Rates And Real Exchange Rates: Evidence From Indexed Bonds

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  • Michael Bleaney
  • Douglas Laxton

Abstract

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

Suggested Citation

  • Michael Bleaney & Douglas Laxton, 2003. "Real Interest Rates And Real Exchange Rates: Evidence From Indexed Bonds," Manchester School, University of Manchester, vol. 71(1), pages 65-77, January.
    • Handle: RePEc:bla:manchs:v:71:y:2003:i:1:p:65-77
    DOI: 10.1111/1467-9957.00335
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    Cited by:

    1. Bhagwan Chowdhry & Richard Roll & Yihong Xia, 2005. "Extracting Inflation from Stock Returns to Test Purchasing Power Parity," American Economic Review, American Economic Association, vol. 95(1), pages 255-276, March.
    2. Mr. Guy M Meredith & Yue Ma, 2002. "The Forward Premium Puzzle Revisited," IMF Working Papers 2002/028, International Monetary Fund.
    3. Mr. Papa M N'Diaye & Mr. Douglas Laxton, 2002. "Monetary Policy Credibility and the Unemployment-Inflation Tradeoff: Some Evidence From 17 Industrial Countries," IMF Working Papers 2002/220, International Monetary Fund.
    4. Dinçer Afat & Michael Frömmel, 2020. "An Alternative Version of Purchasing Power Parity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 25(4), pages 511-517, October.

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