International Interest Rate and Price Level Linkages under Flexible Exchange Rates: A Review of Recent Evidence

摘要: In an open economy, the scope for activist stabilization policy depends on nature of lincages between domestic and international markets goods assets. Tgo important relationships--purchasing power parity uncovered interest-rate parity--have received extensive empirical atpention in recent years are fundamental building blocks several eipirical ex- change rate models. This paper reviews extends econometric findings these two classical relationships their corollary, equality expected real interest rates. Econometric tests assuming rationality expectations whole unfavorable to relationships: with few exceptions, they strongly rejected. A central theme review work is conditional heteroskedasticity inflation exchange forecast errors bias this statistical problem may impart inter- national relationships. The proposes implements a test which many cases produces strong evidence that indeed important.Institutional subscribers NBER working series, residents developing countries download without additional charge at www.nber.org.