In this study, using a data set from 12 OECD countries with floating currency and liberal capital regimes, we analyse interactions between real exchange rates, current account balances, bond yield spread, broad money, industrial production growth and inflation in the framework of panel vector autoregression (PVAR) modelling. Our empirical study shows that changes in real exchange rates may well affect current and capital accounts of the countries under investigation. Empirical findings also highlight that factors influencing the relative price of imports and exports may lead to considerable amount of changes in foreign trade, which, in turn, may affect domestic production. It has been found that improvements in current account balance may deteriorate real economic activity due to a fall in high efficiency intermediate and capital goods. PVAR model estimations imply that short-term interest rates can be used as an efficient tool to eliminate real exchange rate misalignments and to alleviate the negative impact of external imbalances by influencing current accounts and capital accounts. Bond yield differences may have opposite impacts on real exchange rate and current account balance in OECD countries compared to short-term interest rates, while short-term interest rates do not have the capacity to control long-term interest rates.
