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The Real Interest Differential Hypothesis, How Did it Fare in the 1980's?

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  • Jarrett Bruhn

Abstract

The Real Interest Differential hypothesis, an exchange rate modelling breakthrough developed by Jeffrey Frankel (1979), was very successful at predicting variations of the exchange rate between 1974 and 1978 but failed when tested for its predictive ability between 1974 and 1988. Using a monetary model and long term bond expectations model as bases of comparison, it appears that Frankel's success was a product of a period when the genre of asset approach models were successful at predicting exchange rate fluctuations. The three asset approach models all succeed at predicting exchange rate variations in the late 1970's and all deteriorate and fail in the mid to late 1980's.

Suggested Citation

  • Jarrett Bruhn, 1995. "The Real Interest Differential Hypothesis, How Did it Fare in the 1980's?," The American Economist, Sage Publications, vol. 39(2), pages 78-86, October.
    • Handle: RePEc:sae:amerec:v:39:y:1995:i:2:p:78-86
    DOI: 10.1177/056943459503900211
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    References listed on IDEAS

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    1. Richard Meese & Kenneth Rogoff, 1983. "The Out-of-Sample Failure of Empirical Exchange Rate Models: Sampling Error or Misspecification?," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 67-112, National Bureau of Economic Research, Inc.
    2. Martin Feldstein, 1988. "International Economic Cooperation," NBER Books, National Bureau of Economic Research, Inc, number feld88-4.
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    4. Boughton, James M., 1987. "Tests of the performance of reduced-form exchange rate models," Journal of International Economics, Elsevier, vol. 23(1-2), pages 41-56, August.
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    7. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-622, September.
    8. Martin S. Feldstein, 1988. "Introduction to International Economic Cooperation," NBER Chapters, in: International Economic Cooperation, pages 1-10, National Bureau of Economic Research, Inc.
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