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Domestic–foreign Interest Rate Differentials: Near Unit Roots and Symmetric Threshold Models

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Author Info

  • Jack Strauss

    ()
    (Department of Economics, Saint Louis University)

  • Mark E. Wohar

    ()
    (Department of Economics, University of Nebraska at Omaha)

Abstract

This 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 Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 73 (2007)
Issue (Month): 3 (January)
Pages: 814–829

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Handle: RePEc:sej:ancoec:v:73:3:y:2007:p:814-829

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Web page: http://www.southerneconomic.org/
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Cited by:
  1. 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.

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