REAL EXCHANGE-RATES AND REAL INTEREST DIFFERENTIALS - HAVE WE MISSED THE BUSINESS-CYCLE RELATIONSHIP

This paper investigates the link between real exchange rates and real interest differentials over the recent floating-rate period. In contrast to earlier econometric studies, we find evidence of a relationship, with the strongest link at trend and business-cycle frequencies, Because these prior studies focused on high-frequency components of the data, they found no statistical link between real exchange rates and real interest differentials.