Long-run Relationship between Real Exchange and Real Interest Rates

The study tries to find if there are any long-run relationship exists between real exchange rate and real interest rate differentials between India and USA. We build up a theoretical model that will be tested. Cointegration method has been used in this study. Literature review and methodology explained very well. The model studied here, as one would expect, suggests that there is good reason to believe that there should be a systematic relationship between the two variables. However, similar to some other researchers, we cannot find a good empirical representation that is supported by the data.