The Real Interest Di¤erential Model after Twenty Years

It has been twenty years since Frankel (1979) o¤ered the classic empirical support for the Dornbusch (1976) overshooting model against the simple monetary approach model, and almost that long since Driskill and She¤rin (1981) uncovered some important inconsistencies between Frankel’s theoretical framework and his empirical implementation. Frankel’s RID model nevertheless spawned a huge literature in international monetary economics. In this paper, we replicate and update the Frankel (1979) and Driskill and She¤rin (1981) results, in order to o¤er a retrospective and a reëvaluation of this literature. We also explain why the model estimated by Driskill and She¤rin (1981) cannot underpin a critique of Frankel (1979), a point which is not generally recognized. While specialists in international ...nance generally recognize that the initial promise of Frankel’s research has not been kept, we believe that many will be surprised nevertheless by our stark ...ndings. JEL: F31, F40, C13 ¤Please address all correspondence to: Alan G. Isaac, Associate Professor of Economics, American University, Washington, DC 20016. The Real Interest Di¤erential Model after Twenty Years