Advanced Search
MyIDEAS: Login to save this article or follow this journal

Real interest rate persistence in South Africa: evidence and implications

Contents:

Author Info

  • Sonali Das
  • Rangan Gupta

    ()

  • Patrick Kanda
  • Monique Reid
  • Christian Tipoy
  • Mulatu Zerihun

Abstract

The real interest rate is a very important variable in the transmission of monetary policy. It features in vast majority of financial and macroeconomic models. Though the theoretical importance of the real interest rate has generated a sizable literature that examines its long-run properties, surprisingly, there does not exist any study that delves into this issue for South Africa. Given this, using quarterly data (1960:Q2-2010:Q4) for South Africa, our paper endeavors to analyze the long-run properties of the ex post real rate by using tests of unit root, cointegration, fractional integration and structural breaks. In addition, we also analyze whether monetary shocks contribute to fluctuations in the real interest rate based on test of structural breaks of the rate of inflation, as well as, Bayesian change point analysis. Based on the tests conducted, we conclude that the South African EPPR can be best viewed as a very persistent but ultimately mean-reverting process. Also, the persistence in the real interest rate can be tentatively considered as a monetary phenomenon. Copyright Springer Science+Business Media New York 2014

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://hdl.handle.net/10.1007/s10644-012-9132-5
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Springer in its journal Economic Change and Restructuring.

Volume (Year): 47 (2014)
Issue (Month): 1 (February)
Pages: 41-62

as in new window
Handle: RePEc:kap:ecopln:v:47:y:2014:i:1:p:41-62

Contact details of provider:
Web page: http://www.springerlink.com/link.asp?id=113294

Related research

Keywords: Real interest rate; Monetary policy; Persistence; Mean reversion; C22; E21; E44; E52; E62; G12;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Sims, Christopher A., 1988. "Bayesian skepticism on unit root econometrics," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 463-474.
  2. Frederic S. Mishkin, 1984. "The Real Interest Rate: A Multi-Country Empirical Study," Canadian Journal of Economics, Canadian Economics Association, vol. 17(2), pages 283-311, May.
  3. Jing Li & Junsoo Lee, 2010. "ADL tests for threshold cointegration," Journal of Time Series Analysis, Wiley Blackwell, vol. 31(4), pages 241-254, 07.
  4. King, R.G. & Baxter, M., 1990. "Fiscal Policy In General Equilibrium," RCER Working Papers 244, University of Rochester - Center for Economic Research (RCER).
  5. Riané de Bruyn & Rangan Gupta & Lardo Stander, 2013. "Testing the Monetary Model for Exchange Rate Determination in South Africa: Evidence from 101 Years of Data," Contemporary Economics, University of Finance and Management in Warsaw, University of Finance and Management in Warsaw, vol. 7(1), March.
  6. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, Econometric Society, vol. 57(6), pages 1361-1401, November.
  7. Gregory, A.W. & Hansen, B.E., 1992. "Residual-Based Tests for Cointegration in Models with Regime Shifts," RCER Working Papers 335, University of Rochester - Center for Economic Research (RCER).
  8. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, Econometric Society, vol. 66(1), pages 47-78, January.
  9. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc.
  10. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1429-45, November.
  11. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, vol. 94(4), pages 1055-1084, September.
  12. Faust, Jon, 1996. "Near Observational Equivalence and Theoretical size Problems with Unit Root Tests," Econometric Theory, Cambridge University Press, vol. 12(04), pages 724-731, October.
  13. Andrew W. Lo, 1989. "Long-term Memory in Stock Market Prices," NBER Working Papers 2984, National Bureau of Economic Research, Inc.
  14. Reis, Ricardo, 2007. "The analytics of monetary non-neutrality in the Sidrauski model," Economics Letters, Elsevier, vol. 94(1), pages 129-135, January.
  15. Crowder, William J & Hoffman, Dennis L, 1996. "The Long-Run Relationship between Nominal Interest Rates and Inflation: The Fisher Equation Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 28(1), pages 102-18, February.
  16. Granger, C. W. J., 1980. "Long memory relationships and the aggregation of dynamic models," Journal of Econometrics, Elsevier, Elsevier, vol. 14(2), pages 227-238, October.
  17. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(2), pages 223-47, April.
  18. Bruce E. Hansen, 1999. "The Grid Bootstrap And The Autoregressive Model," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 594-607, November.
  19. DeJong, David N. & Nankervis, John C. & Savin, N. E. & Whiteman, Charles H., 1992. "The power problems of unit root test in time series with autoregressive errors," Journal of Econometrics, Elsevier, Elsevier, vol. 53(1-3), pages 323-343.
  20. Darby, Michael R, 1975. "The Financial and Tax Effects of Monetary Policy on Interest Rates," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 13(2), pages 266-76, June.
  21. Kafayat Amusa & Rangan Gupta & Shaakira Karolia & Beatrice D. Simo Kengne, 2010. "The Long-Run Impact of Inflation in South Africa," Working Papers 201029, University of Pretoria, Department of Economics.
  22. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 66, pages 467.
  23. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1269-86, September.
  24. Rangan Gupta & Monique Reid, 2012. "Macroeconomic Surprises and Stock Returns in South Africa," Working Papers 201212, University of Pretoria, Department of Economics.
  25. Weiss, Laurence M, 1980. "The Effects of Money Supply on Economic Welfare in the Steady State," Econometrica, Econometric Society, Econometric Society, vol. 48(3), pages 565-76, April.
  26. Monique Reid, 2009. "The sensitivity of South African inflation expectations to surprises," Working Papers 16/2009, Stellenbosch University, Department of Economics.
  27. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 249-65, April.
  28. Marco Espinosa-Vega & Steven Russell, 1998. "The long-run real effects of monetary policy: Keynesian predictions from a neoclassical model," Working Paper, Federal Reserve Bank of Atlanta 98-6, Federal Reserve Bank of Atlanta.
  29. Christopher J. Neely & David E. Rapach, 2008. "Real interest rate persistence: evidence and implications," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 609-642.
  30. Chandra Erdman & John W. Emerson, . "bcp: An R Package for Performing a Bayesian Analysis of Change Point Problems," Journal of Statistical Software, American Statistical Association, American Statistical Association, vol. 23(i03).
  31. Bierens, H.J., 1995. "Nonparametric cointegration analysis," Discussion Paper, Tilburg University, Center for Economic Research 1995-123, Tilburg University, Center for Economic Research.
  32. Katsumi Shimotsu, 2006. "Exact Local Whittle Estimation of Fractional Integration with Unknown Mean and Time Trend," Working Papers, Queen's University, Department of Economics 1061, Queen's University, Department of Economics.
  33. Bierens, Herman J, 2000. "Nonparametric Nonlinear Cotrending Analysis, with an Application to Interest and Inflation in the United States," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 18(3), pages 323-37, July.
  34. Rapach, David E & Wohar, Mark E, 2005. "Regime Changes in International Real Interest Rates: Are They a Monetary Phenomenon?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 37(5), pages 887-906, October.
  35. Andolfatto, David & Hendry, Scott & Moran, Kevin, 2008. "Are inflation expectations rational?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(2), pages 406-422, March.
  36. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, Elsevier, vol. 112(2), pages 359-379, February.
  37. David E. Rapach & Mark E. Wohar, 2004. "The persistence in international real interest rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 339-346.
  38. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, Elsevier, vol. 54(1-3), pages 159-178.
  39. Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, American Finance Association, vol. 43(5), pages 1095-1112, December.
  40. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
  41. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 10(3), pages 251-70, July.
  42. Breitung, Jorg, 2002. "Nonparametric tests for unit roots and cointegration," Journal of Econometrics, Elsevier, Elsevier, vol. 108(2), pages 343-363, June.
  43. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
  44. Robert J. Barro & Xavier Sala-i-Martin, 2003. "Economic Growth, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262025531, December.
  45. Marco Espinosa & Steven Russell, 1998. "Can a Policy of Higher Inflation Reduce Real Interests in the Long Run?," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 92-103, February.
  46. Lioui, Abraham & Poncet, Patrice, 2008. "Monetary non-neutrality in the Sidrauski model under uncertainty," Economics Letters, Elsevier, vol. 100(1), pages 22-26, July.
  47. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
  48. James B. Bullard & Steven Russell, 2004. "How costly is sustained low inflation for the U.S. economy?," Review, Federal Reserve Bank of St. Louis, issue May, pages 35-68.
  49. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
  50. Blough, Stephen R, 1992. "The Relationship between Power and Level for Generic Unit Root Tests in Finite Samples," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 7(3), pages 295-308, July-Sept.
  51. Kirsten L. Ludi & Marc Ground, 2006. "Investigating the Bank-Lending Channel in South Africa: A VAR Approach," Working Papers 200604, University of Pretoria, Department of Economics.
  52. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 71, pages 280.
  53. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 357-84, March.
  54. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, Elsevier, vol. 7(3), pages 265-296, September.
  55. Perron, P. & Rodriguez, G., 2000. "Residual Based Tests for Cointegration with GLS Detrended Data," Working Papers, University of Ottawa, Department of Economics 0004e, University of Ottawa, Department of Economics.
  56. Miguel Lacerda & Johannes W. Fedderke & Linda M. Haines, 2010. "Testing For Purchasing Power Parity And Uncovered Interest Parity In The Presence Of Monetary And Exchange Rate Regime Shifts," South African Journal of Economics, Economic Society of South Africa, vol. 78(4), pages 363-382, December.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:kap:ecopln:v:47:y:2014:i:1:p:41-62. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F. Baum).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.