Department of Finance, Louisiana State University. Leslie Young, René Stulz (the editor), and an anonymous referee provided helpful comments, but any remaining errors are my responsibility.
International Interest Rates, Exchange Rates, and the Stochastic Structure of Supply
Article first published online: 30 APR 2012
1990 The American Finance Association
The Journal of Finance
Volume 45, Issue 2, pages 655–671, June 1990
How to Cite
BOYLE, G. W. (1990), International Interest Rates, Exchange Rates, and the Stochastic Structure of Supply. The Journal of Finance, 45: 655–671. doi: 10.1111/j.1540-6261.1990.tb03710.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
In a dual-currency, flexible exchange rate model, both nominal and real foreign exchange premia depend on investor risk attitudes, consumption parameters, and the stochastic structure of currency and commodity supplies. When supplies are random, their joint correlation structure determines the sign of the premia. If the money supplies are identically distributed, then all foreign exchange premia, regardless of the currency of denomination, are zero. A positive correlation between the value of a country's currency and its nominal interest rate need not indicate real interest rate movements. Relative bond prices can be negatively correlated with the terms of trade.