The long-run determination of the real exchange rate. Evidence from an intertemporal modelling framework using the dollar-pound exchange rate.

Abstract

This paper develops a model of optimal choice over an array of different assets, including domestic and foreign bonds, domestic and foreign equities and domestic and foreign real money balances to examine the determination of the real exchange rate in the long-run. The model is tested empirically using data from the UK and the USA. The results show that all the coefficients of the model are right signed and significant and consequently financial assets may play a significant role in the determination of the real exchange rate.

The Role of National Debts in the Determination of the Yen‐dollar Exchange Rate

“…In Litsios and Pilbeam (2017), the determination of the long-run real exchange rate is investigated based on a similar exposition of the utility function but here we also incorporate a role for national debts and focus on the nominal exchange rate. In Litsios and Pilbeam (2017), the determination of the long-run real exchange rate is investigated based on a similar exposition of the utility function but here we also incorporate a role for national debts and focus on the nominal exchange rate.…”

“…In Litsios and Pilbeam (), the determination of the long‐run real exchange rate is investigated based on a similar exposition of the utility function but here we also incorporate a role for national debts and focus on the nominal exchange rate. In addition, given the long‐run focus of the research, the demand for real money balances is treated as quite stable.…”