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This study empirically tests the long-run relationship between real exchange rate and real interest rate (RERI) differentials using quarterly panel data over the period 1993 - 2018 employing cointegration methods for a panel of 12 inflation-targeting countries. The theoretical relationship of a long-run equilibrium relationship between real exchange rates and interest rate differentials is essentially derived from the Purchasing Power Parity (PPP) and uncovered interest parity theories. This theoretical relationship has become a standard and acceptable theory in open economy macroeconomics. Even so, empirical evidence on this long-run relationship has been mixed. Our study differs from previous studies in two respects. First, we investigate this relationship only for countries that have the same monetary policy framework (inflation targeting) (interest rates and exchange rates are theoretically important in the transmission of monetary impulses to the real economy). Second, we use both multivariate and panel cointegration methods in our investigation. The results show some evidence of cointegration in the country-by-country cases that we investigated using multivariate cointegration tests and weak evidence of cointegration between real exchange rate and real interest rate differentials for the sample of inflation targeting countries using panel cointegration tests. The findings in this study corroborate early works and recent studies on the long-run relationship between real exchange rate and real interest rate differentials. The empirical evidence from this study concludes that there is no clear evidence that the real interest rate – real exchange rate relationship in inflation-targeting countries are different from other countries with well-developed financial markets. From a policy perspective, real interest rate differentials are not a good predictor of real exchange rates in inflation-targeting countries.

A crucial analysis of Mongolia's economic crisis and path to recovery. This World Bank study offers a deep dive into Mongolia's economic landscape between 2008 and 2010, a period marked by a severe downturn triggered by collapsing copper prices and dwindling external demand. Discover the structural weaknesses and policy missteps that amplified the crisis, and the government's response. Mongolia Economic Retrospective: 2008-2010 reveals: * How expansive fiscal and monetary policies, coupled with a pegged currency, led to macroeconomic instability. * The impact of the mining sector, including the risks of \"Dutch disease.\" * The importance of fiscal stability and banking sector reform for sustainable growth. For policymakers, economists, and anyone interested in economic development, this retrospective provides valuable lessons for managing commodity-dependent economies and navigating future challenges.

U ovom radu daju se novi empirijski dokazi relevantni za rasprave o neovisnosti monetarne politike u kontekstu uvoðenja eura u tri zemlje Srednje i Istočne Europe (CEE): Češkoj, Maðarskoj i Poljskoj. Za razliku od mnogih drugih autora, u ovom se radu težište stavlja na realne, a ne na nominalne kamatne stope, jer su realne kamatne stope u središtu moderne makroekonomske teorije i monetarne politike. U istraživanju se primjenjuje nekoliko metodologija za ispitivanje konvergencije realnih kamatnih stopa izmeðu ovih zemalja i euro-područja kako bi se utvrdili glavne odrednice realnih kamatnih stopa. Na temelju testova jediničnog korijena nalazimo dokaze o konvergenciji realnih kamatnih stopa u tim zemljama, čime se potvrðuje hipoteza o realnom kamatnom paritetu (RIRP). Nadalje, primijenjena analiza glavnih komponenata (PCA) ukazuje na činjenicu da se zajedničkim faktorom izdvojenim iz uzorka zemalja Srednje i Istočne Europe i pojedinih zemalja euro-područja može objasniti visok udio kretanja realnih kamatnih stopa u tim zemljama. Konačno, rezultati našeg predloženog novog analitičkog okvira za analizu odrednica realnih kamatnih stopa u malim otvorenim gospodarstvima, temeljenog na Bayesovskom VAR modelu s pretpostavkom blok-egzogenosti (eng. block exogeneity ), pokazuju da vanjski šokovi imaju nezanemariv učinak na kretanje realnih kamatnih stopa u odabranim zemljama srednje i istočne Europe. Dakle, naši rezultati pokazuju da realne kamatne stope u SIE ovise o čimbenicima koji su izvan dosega domaćih kreatora monetarne politike. U tom smislu može se zaključiti da je (konvencionalna) neovisnost monetarne politike u tim zemljama ograničena. Stoga gubitak neovisnosti monetarne politike vidimo kao pretjerano naglašeni argument u raspravama o uvoðenju eura u tim zemljama. Meðutim, svjesni smo da su se nacionalne središnje banke u Srednjoj i Istočnoj Europi nedavno počele više oslanjati na nekonvencionalne mjere, što im daje veći stupanj fleksibilnosti (i autonomije).

In this paper, we use the Bai and Perron (1998, 2001, 2003) methodology to test for multiple structural breaks in the mean real interest rate for 13 industrialized countries. We find extensive evidence of structural breaks in the mean real interest rate for all 13 countries. In an attempt to explain the breaks in international real interest rates, we also test for multiple structural breaks in the mean inflation rate for the 13 countries. Once again, we find extensive evidence of structural breaks in the mean inflation rate for all of the countries. Interestingly, the breaks in inflation rates and real interest rates often coincide, with increases (decreases) in the mean inflation rate as we move from one regime to the next typically associated with decreases (increases) in the mean real interest rate.

This paper investigates the convergence of long-term ex ante real interest rates (RIRs) obtained from Canadian, French, UK, and U.S. inflation indexed government bonds. In contrast to previous research, our evidence suggests full convergence in the long run and, hence, capital market integration. For the same sample period, global convergence is rejected for RIRs measured in conventional terms. From these results, we conclude that previous tests of the long-run real interest rate parity might have suffered from weak measurement of real capital market interest rates.

We investigate the impact of federal government budget deficits and federal personal income tax rates on the ex post real interest rate yield on ten-year US Treasury notes. Using autoregressive two-stage least squares estimations for the post-Bretton Woods era, we find that the yield on these Treasury issues has been an increasing function of the federal budget deficit as a percent of GDP, both in the form of the total/unified deficit and the primary deficit, and also an increasing function of the average effective federal personal income tax rate. The estimation reveals that growth in the M2 money supply (relative to GDP) acts to reduce the real interest rate yield on ten-year Treasuries. Consequently, while a growing money supply can help to keep real interest rates on Treasury notes (and hence federal debt service costs) down, policymakers should be sensitive to the fact that both budget deficit increases and tax rate increases can elevate the real interest rate. JEL codes: E43, E62, H62

Concerns about economies facing secular stagnation—a period of persistently lower growth—have been renewed after the start of the financial crisis in 2008-2009. This issue is well investigated for the euro area as a whole or for the individual countries forming the monetary union, with the general consensus being that secular stagnation is not present in the Economic and Monetary Union (EMU). So far no studies have been conducted for the remaining European countries, and thus this study tackles this issue for the five non-EMU European countries using the well-established Laubach-Williams model to estimate the unobservable equilibrium real interest rate and compare it with the actual real rate. The obtained results have important implications for national policymakers, i.e., if secular stagnation is present in one country, then there is a risk of growth divergence with the country's most important trading partners. The results also indicate that secular stagnation is not a significant threat to the non-EMU European countries, so they do not face structurally different growth dynamics compared with those of the euro area.

We show how changes in the volatility of the real interest rate at which small open emerging economies borrow have an important effect on variables like output, consumption, investment, and hours. We start by documenting the strong evidence of time-varying volatility in the real interest rates faced by four emerging economies: Argentina, Brazil, Ecuador, and Venezuela. We estimate a stochastic volatility process for real interest rates. Then, we feed this process in a standard small open economy business cycle model. We find that an increase in real interest rate volatility triggers a fall in output, consumption, investment, hours, and debt.

This paper presents a model that reproduces the uncovered interest rate parity puzzle. Investors have preferences with external habits. Countercyclical risk premia and procyclical real interest rates arise endogenously. During bad times at home, when domestic consumption is close to the habit level, the representative investor is very risk averse. When the domestic investor is more risk averse than her foreign counterpart, the exchange rate is closely tied to domestic consumption growth shocks. The domestic investor therefore expects a positive currency excess return. Because interest rates are low in bad times, expected currency excess returns increase with interest rate differentials.

This paper analyzes the empirical fulfillment of the real interest rate parity (RIRP) theory for a pool of central and east European countries. To do so, we apply the recently developed Ng and Perron (2001) unit root tests, which are corrected versions of existing unit root tests, and the Kapetanios et al. (2003) unit root test, which generalizes the alternative hypothesis to the globally stationary smooth transition autoregression model. We find evidence in favor of the empirical fulfillment of RIRP, particularly when taking into account the possibility of nonlinearities in the real interest rate differential.