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The Real Interest Rate Differential: International Evidence Based On Non-Linear Unit Root Tests

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  • Ahmad Zubaidi Baharumshah
  • Venus Khim-Sen Liew
  • Chan Tze Haw

Abstract

This paper aims at testing international parity conditions by using nonlinear unit root tests advocated by Kapetanios et al. (2003, KSS). Results from the KSS tests based on 17 countries (G7 and 10 Asian countries) overwhelmingly show that the adjustment of real interest rates towards the RIP follows a nonlinear process except for the Malaysian relationships with both the US and Japan. Overall, the empirical results are in favor of RIP using the US and Japan as the center countries but only if nonlinearities are accounted for in the data generating process. Our findings confirm that interest rate differentials, like the real exchange rates reported in recent literature, display a nonlinear mean reversion process.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Bulletin of Economic Research.

Volume (Year): 61 (2009)
Issue (Month): 1 (01)
Pages: 83-94

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Handle: RePEc:bla:buecrs:v:61:y:2009:i:1:p:83-94

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References

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Cited by:
  1. Mark J. Holmes & Jesús Otero & Theodore Panagiotidis, 2011. "Real Interest Parity: A Note on Asian Countries Using Panel Stationarity Tests," Koç University-TUSIAD Economic Research Forum Working Papers 1117, Koc University-TUSIAD Economic Research Forum.
  2. Claudiu Tiberiu Albulescu & Dominique Pepin & Aviral Kumar Tiwari, 2014. "A re-examination of real interest parity in CEECs using old and new generations of panel unit root tests," Papers 1403.3627, arXiv.org.
  3. Baharumshah, Ahmad Zubaidi & Soon, Siew-Voon & Hamzah, Nor Aishah, 2013. "Parity reversion in real interest rate in the Asian countries: Further evidence based on local-persistent model," Economic Modelling, Elsevier, vol. 35(C), pages 634-642.

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