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Real interest rates, inflation and the open economy: A regime-switching perspective on Australia and New Zealand

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Author Info

  • Holmes, Mark J.
  • Dutu, Richard
  • Cui, Xiaoman

Abstract

We investigate the time-series properties of Australian and New Zealand real interest rates within a Markov-switching framework. This enables us to identify characteristics in real interest rate behavior hitherto unacknowledged. We find that rates switch between alternative stationary regimes characterized by differing means, speeds of mean-reversion and volatility. For New Zealand, high rates of inflation increase the probability of remaining in a regime characterized by a faster speed of adjustment. Further application of this methodology considers the real interest rate differential between Australia and New Zealand and points to differing regimes based on volatility rather than persistence.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 18 (2009)
Issue (Month): 2 (March)
Pages: 351-360

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Handle: RePEc:eee:reveco:v:18:y:2009:i:2:p:351-360

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Web page: http://www.elsevier.com/locate/inca/620165

Related research

Keywords: Stationarity Regime-switching Real interest rate Parity;

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