Domestic–foreign Interest Rate Differentials: Near Unit Roots and Symmetric Threshold Models
AbstractThis paper investigates the near unit root behavior of interest rate differentials across countries using a symmetric Band–TAR model that allows for a heteroscedastic error process. We find that the time series properties of monthly short-term interest differentials over the period 1974–2005 between the United States and Canada, France, Germany, Japan, and the United Kingdom can be characterized by a symmetric Band–TAR process, which can explain its (near) unit root behavior reported in the extant literature. Results significantly reject a linear model in favor of the alternative hypothesis of a two-regime symmetric threshold model that exhibits significantly greater persistence within the threshold bands than when outside the threshold bands.
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Bibliographic InfoArticle provided by Southern Economic Association in its journal Southern Economic Journal.
Volume (Year): 73 (2007)
Issue (Month): 3 (January)
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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- Baharumshah, Ahmad Zubaidi & Liew, Venus Khim-Sen & Chan, Tze-Haw, 2007.
"The real interest rate differential: international evidence based on nonlinear unit root tests,"
7300, University Library of Munich, Germany.
- Ahmad Zubaidi Baharumshah & Venus Khim-Sen Liew & Chan Tze Haw, 2009. "The Real Interest Rate Differential: International Evidence Based On Non-Linear Unit Root Tests," Bulletin of Economic Research, Wiley Blackwell, vol. 61(1), pages 83-94, 01.
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