The relationship between real exchange rate movement and Trade Openness Open Access

Abstract

Among macroeconomic topics, exchange rate literature has been the most challenging subject. Throughout history, economists have been seeking to find a simply structured linear equation to explain and forecast macroeconomic indicators. As a result, they have found groundbreaking equations such as Taylor rule for interest rate. However, despite their rigorous research and efforts, economists did not succeed in finding an equation for predicting exchange rate. The Mundell-Fleming model established a foundation for future economists, yet no one has played an important role except Dornbusch, who wrote his famous overshooting model. In an attempt to locate a simply structured linear equation to explain exchange rate movement, I will add a twist into Mundell-Fleming model. The model suggests a direct effect of real interest rate differential between domestic market and foreign market on real exchange rate. The model has different approaches toward two distinctive situations, the large open economy, and small open economy. My question is how large an economy should be to be considered as the large open economy and vice versa. I will explore this question by implementing key variables, such as trade openness into the Mundell-Fleming model.

Table of Contents

Table of Contents

Introduction.............................................................................................................1

Literature Review......................................................................................................4

DATA DESCRIPTION.................................................................................................. 9

Methodology...........................................................................................................12

Empirical Results......................................................................................................14

Conclusion..............................................................................................................24

Reference...............................................................................................................26

List of Figures

Figure 1. Line graph of Spain RER movement and interest rate Diff and Openness ................14

Figure 2. Line graph of Germany RER movement and interest rate Diff and Openness.............15

Figure 3. Line graph of Australia RER movement and interest rate parity and Openness..........15

Figure 4. Line graph of Republic of Korea RER movement and interest rate parity and Openness16

List of Tables

Table 1……………………………………………………………………………………………………………………………………..17
Table 2 …………………………………………………………………………………………………………………………………….19
Table 3……………………………………………………………………………………………………………………………………..21
Table 4……………………………………………………………………………………………………………………………………..23

About this Honors Thesis

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School	Emory College
Department	Economics and Mathematics
Degree	BA
Submission	Honors Thesis
Language	English
Research Field	Economics, Finance
Keyword	Trade openness Economic Openess Real Exchange Rate
Committee Chair / Thesis Advisor	Molodtsova, Tetyana, Emory University
Committee Members	Li, Yu, Emory University Roth Jr., Robert, Emory University

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