This paper empirically examines the long-run relationship between real exchange rates
and real interest rate differentials over the recent floating exchange rate period,
using a panel cointegration method, with data for a set of industrialized countries.
The paper finds evidence of statistically significant long-run relationships and
plausible point estimates, which contrasts with much existing evidence. The failure
of others to establish such relationships may reflect the estimation method they
use rather than any inherent deficiency of the fundamentals-based models.