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A New Test of the Real Interest Rate Parity Hypothesis: Bounds Approach and Structural Breaks

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  • George Bagdatoglou
  • Alexandros Kontonikas

Abstract

We test the real interest rate parity hypothesis using data for the G7 countries over the period 1970-2008. Our contribution is two-fold. First, we utilize the ARDL bounds approach of Pesaran et al. (2001) which allows us to overcome uncertainty about the order of integration of real interest rates. Second, we test for structural breaks in the underlying relationship using the multiple structural breaks test of Bai and Perron (1998, 2003). Our results indicate significant parameter instability and suggest that, despite the advances in economic and financial integration, real interest rate parity has not fully recovered from a breakdown in the 1980s.

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File URL: http://hdl.handle.net/10.1111/j.1467-9396.2011.00977.x
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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 19 (2011)
Issue (Month): 4 (09)
Pages: 718-727

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Handle: RePEc:bla:reviec:v:19:y:2011:i:4:p:718-727

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Cited by:
  1. 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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