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A Re-examination of Real Interest Rate Parity

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Author Info
Jyh-Lin Wu
Show-Lin Chen
Abstract

Empirical investigation based on consumer-price-index-based real interest rates is used to conclude that real interest rate parity is not supported. In this paper, the authors employ three panel-based unit-root tests, provided by Andrew Levin and Chien-Fu Lin (1992), Kyung So Im, Hashem M. Pesaran, and Yongcheol Shin (1995), and G. S. Maddala and Shaowen Wu (1996), to examine the stationarity of real interest differentials. Using monthly observations on Euro-market rates, they support the mean-reverting property of real interest differentials and, hence, the real interest rate parity. This finding is consistent with the observation that international integration of financial markets has increased dramatically since 1979.

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File URL: http://economics.ca/cgi/xms?jab=v31n4/06.pdf
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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 31 (1998)
Issue (Month): 4 (November)
Pages: 837-851
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Handle: RePEc:cje:issued:v:31:y:1998:i:4:p:837-851

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F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

Cited by:
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  1. Mª Mar Sánchez, 2002. "Interest-Rate Models For Us And Uk With Mixed Inflationary Expectations. A Comparison With The Rational And The Adaptive Scheme," Working Papers. Serie AD 2002-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
  2. 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 91, Money Macro and Finance Research Group. [Downloadable!]
  3. L. Vanessa Smith & Stephen Leybourne & Tae-Hwan Kim & Paul Newbold, 2004. "More powerful panel data unit root tests with an application to mean reversion in real exchange rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(2), pages 147-170. [Downloadable!]
  4. Christian Dreger, 2008. "Does the Nominal Exchange Rate Regime Affect the Real Interest Parity Condition?," Discussion Papers of DIW Berlin 819, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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  5. Ignacio Mauleón & Mª Mar Sánchez, 2000. "Fundamentals Of The Us And The Uk Interest Rates Under The Rational Expectation Scheme," Working Papers. Serie AD 2000-20, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
  6. 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. [Downloadable!]
    Other versions:
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