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Real Interest Rate Parity under Regime Shifts and Implications for Monetary Policy

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  • Wu, Jyh-Lin
  • Fountas, Stilianos

Abstract

We use recently developed cointegration tests that determine endogenously the regime shift to test bilateral real interest rate convergence (real interest rate parity) in the G7 against the US in the 1974-1995 period. In contrast with previous studies that employed classical regression analysis and standard cointegration tests, our innovative approach provides strong evidence in favour of bilateral real interest rate convergence between the US and several countries in our sample, in particular for short-term real interest rates. Our results highlight the fact that for a number of countries in our sample (Canada and UK) monetary policy can act as a stabilization policy tool through its effect on domestic long-term real interest rates while for others (France and Germany) long-term real interest rate changes are influenced by the US monetary policy stance. Copyright 2000 by Blackwell Publishers Ltd and The Victoria University of Manchester

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Bibliographic Info

Article provided by University of Manchester in its journal Manchester School.

Volume (Year): 68 (2000)
Issue (Month): 6 (December)
Pages: 685-700

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Handle: RePEc:bla:manchs:v:68:y:2000:i:6:p:685-700

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Cited by:
  1. Byrne, Joseph P. & Nagayasu, Jun, 2008. "Structural Breaks in the Real Exchange Rate and Real Interest Rate Relationship," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2008-52, Scottish Institute for Research in Economics (SIRE).
  2. Baharumshah, Ahmad Zubaidi & Liew, Venus Khim-Sen & Chan, Tze-Haw, 2007. "The real interest rate differential: international evidence based on nonlinear unit root tests," MPRA Paper 7300, University Library of Munich, Germany.
  3. Sekioua, Sofiane H., 2008. "Real interest parity (RIP) over the 20th century: New evidence based on confidence intervals for the largest root and the half-life," Journal of International Money and Finance, Elsevier, Elsevier, vol. 27(1), pages 76-101, February.
  4. Christian Dreger, 2008. "Does the Nominal Exchange Rate Regime Affect the Real Interest Parity Condition?," Working Paper / FINESS, DIW Berlin, German Institute for Economic Research 1.1c, DIW Berlin, German Institute for Economic Research.
  5. Somchai Amornthum & Carl Bonham, 2008. "Financial Integration in the Pacific Basin Region: RIP by PANIC Attack?," Working Papers, University of Hawaii at Manoa, Department of Economics 200802, University of Hawaii at Manoa, Department of Economics.
  6. Chan, Tze-Haw, 2002. "Dynamic financial linkages among the Asia Pacific economies: an empirical assessment of real interest parity condition," MPRA Paper 34642, University Library of Munich, Germany.
  7. Sofiane H. Sekioua, 2004. "Real interest parity (RIP) over the 20th century: New evidence based on confidence intervals for the dominant root and half-lives of shocks," Money Macro and Finance (MMF) Research Group Conference 2004, Money Macro and Finance Research Group 91, Money Macro and Finance Research Group.
  8. repec:diw:diwfin:diwfin01013 is not listed on IDEAS
  9. Byrne, Joseph P. & Nagayasu, Jun, 2010. "Structural breaks in the real exchange rate and real interest rate relationship," Global Finance Journal, Elsevier, vol. 21(2), pages 138-151.
  10. Arusha Cooray, 2009. "Is the adjustment to real interest rate parity asymmetric?," Empirica, Springer, Springer, vol. 36(4), pages 407-418, November.
  11. Maki, Daiki, 2012. "Tests for cointegration allowing for an unknown number of breaks," Economic Modelling, Elsevier, Elsevier, vol. 29(5), pages 2011-2015.
  12. Kavita Sirichand & Andrew Vivian & Mark E.Wohar, 2014. "Examining real interest parity: which component reverts quickest and in which regime?," Discussion Paper Series, Department of Economics, Loughborough University 2014_05, Department of Economics, Loughborough University, revised Jul 2014.
  13. Giorgio Canarella & Stephen Miller & Stephen Pollard, 2011. "The Global Financial Crisis and Stochastic Convergence in the Euro Area," International Advances in Economic Research, Springer, Springer, vol. 17(3), pages 315-333, August.
  14. Baharumshah, Ahmad Zubaidi & Haw, Chan Tze & Fountas, Stilianos, 2005. "A panel study on real interest rate parity in East Asian countries: Pre- and post-liberalization era," Global Finance Journal, Elsevier, vol. 16(1), pages 69-85, August.
  15. Christian Upper & Andreas Worms, 2003. "Real long-term interest rates and monetary policy: a cross-country perspective," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 234-257 Bank for International Settlements.
  16. Salah A. Nusair, 2006. "Real Interest Rate Parity: Evidence from Industrialized Countries," Annals of Economics and Finance, Society for AEF, vol. 7(2), pages 425-457, November.

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