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Evidence of nonlinear mean reversion in the real interest rate

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  • Zisimos Koustas
  • Jean-Francois Lamarche

Abstract

This article utilizes tests for a unit root that have power against nonlinear alternatives to provide empirical evidence on the time series properties of the ex-post real interest rate in the G7 countries. We find that the unit root hypothesis can be rejected in the presence of a nonlinear alternative motivated by theoretical literature on optimal monetary policy rules. This represents a reversal of the results obtained using standard linear unit-root and cointegration tests. Tests for linearity reject this hypothesis for Canada, France, Italy and Japan for which we estimate nonlinear models capturing the dynamics of the interest rate. For these countries, ex-post real interest rates follow a nonlinear model characterized by mean reversion and provide statistical evidence for the Fisher effect.

Suggested Citation

  • Zisimos Koustas & Jean-Francois Lamarche, 2010. "Evidence of nonlinear mean reversion in the real interest rate," Applied Economics, Taylor & Francis Journals, vol. 42(2), pages 237-248.
    • Handle: RePEc:taf:applec:v:42:y:2010:i:2:p:237-248
    DOI: 10.1080/00036840701579242
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    References listed on IDEAS

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    1. George Kapetanios & Yongcheol Shin, 2006. "Unit root tests in three-regime SETAR models," Econometrics Journal, Royal Economic Society, vol. 9(2), pages 252-278, July.
    2. George Kapetanios & Yongcheol Shin, 2006. "Unit root tests in three-regime SETAR models," Econometrics Journal, Royal Economic Society, vol. 9(2), pages 252-278, July.
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    1. Bosupeng, Mpho & Biza-Khupe, Simangaliso, 2015. "The Impact of Money Supply Volatility on the Fisher Effect –A Botswana Empirical Perspective," MPRA Paper 77920, University Library of Munich, Germany, revised 2015.
    2. Pelin Öge Güney & Erdinç Telatar & Mübariz Hasanov, 2015. "Time series behaviour of the real interest rates in transition economies," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 28(1), pages 104-118, January.
    3. Panopoulou, Ekaterini & Pantelidis, Theologos, 2016. "The Fisher effect in the presence of time-varying coefficients," Computational Statistics & Data Analysis, Elsevier, vol. 100(C), pages 495-511.
    4. Ahmed Mehedi Nizam, 2020. "How the banking system is creating a two-way inflation in an economy," PLOS ONE, Public Library of Science, vol. 15(4), pages 1-40, April.
    5. Dong-Hyeon Kim & Shu-Chin Lin & Joyce Hsieh & Yu-Bo Suen, 2018. "The Fisher Equation: A Nonlinear Panel Data Approach," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(1), pages 162-180, January.
    6. Alfred A. Haug, 2014. "On real interest rate persistence: the role of breaks," Applied Economics, Taylor & Francis Journals, vol. 46(10), pages 1058-1066, April.
    7. Lindenberg, Nannette & Westermann, Frank, 2012. "Common trends and common cycles among interest rates of the G7-countries," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1125-1140.
    8. NEIFAR, MALIKA & HACHICHA, Fatma, 2022. "GFH validity for Canada, UK, and Suisse stock markets: Evidence ‎from univariate and panel ARDL models," MPRA Paper 114613, University Library of Munich, Germany.
    9. Bosupeng, Mpho, 2016. "On The Fisher Effect: A Review," MPRA Paper 77916, University Library of Munich, Germany, revised 2016.
    10. Giorgio Canarella & Luis A. Gil-Alana & Rangan Gupta & Stephen M. Miller, 2020. "The Behavior of Real Interest Rates: New Evidence from a ``Suprasecular" Perspective," Working Papers 202093, University of Pretoria, Department of Economics.

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