OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

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Exchange Rates and Real Long-Term Interest-Rate Differentials

Evidence for Eighteen OECD Countries

The bivariate relationship between real exchange rates and the real long-term interest rate differential has been investigated in a number of recent studies. By exchange-rate-equation standards, this specification does a relatively good job of tracking the historical movements in the dollar-Deutschemark and the dollar-yen bilateral exchange rates, and the dollar effective exchange rate; but does a poor job for the dollar-sterling rate. This paper extends the analysis to 18 OECD countries, in bilateral as well as effective terms. Results from earlier studies are confirmed, but in general the estimation results are sufficiently mixed to suggest that the absence of any risk premia variables may be an important omission ...


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