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On the Characterisation of the World Real Interest Rate

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  • Jong Eun Lee

Abstract

This paper characterises the world real interest rate as a common trend in real interest rates in Germany, Japan, and the United States even if there is scepticism in the existence of the world real interest. In theoretical terms, real interest parity is based on the presumed validity of uncovered interest parity and purchasing power parity, but the empirical evidence of these parity conditions is not strong and thus the presence of the world real interest rate. The significance of this paper is, therefore, to visualise the current level of international economic integration by characterising the approximate world real interest rate as a single common trend, taking full advantage of the fact that real interest rates in three large open economies have been moving together sharing a common component even if their levels are distinctively different. This single common trend has desirable properties as the world real interest rate. First, it is a parsimonious and monotonically increasing function of the real interest rates in three large open economies that can be world price or interest rate maker, in contrast with small open economies. Second, it is moving together with national real interest rates one for one. Hence, the deviations from the world rate are temporary because common trend represents the common driving force of national rates over the long run period. Third, it can explain as high a proportion as possible of the variances of national rates.

Suggested Citation

  • Jong Eun Lee, 2002. "On the Characterisation of the World Real Interest Rate," The World Economy, Wiley Blackwell, vol. 25(2), pages 247-255, February.
  • Handle: RePEc:bla:worlde:v:25:y:2002:i:2:p:247-255
    DOI: 10.1111/1467-9701.00429
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    Cited by:

    1. Gengenbach, C. & Urbain, J.R.Y.J. & Westerlund, J., 2008. "Panel error correction testing with global stochastic trends," Research Memorandum 051, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    2. Everaert, Gerdie, 2014. "A panel analysis of the fisher effect with an unobserved I(1) world real interest rate," Economic Modelling, Elsevier, vol. 41(C), pages 198-210.
    3. Joakim Westerlund, 2008. "Panel cointegration tests of the Fisher effect," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(2), pages 193-233.

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