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Policy-Induced Mean Reversion in the Real Interest Rate?

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Author Info

  • Zisimos Koustas

    ()
    (Department of Economics, Brock University)

  • Jean-Francois Lamarche

    ()
    (Department of Economics, Brock University)

Abstract

This paper 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.

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File URL: ftp://coffee.econ.brocku.ca/RePec/pdf/0601.pdf
File Function: First version, July 2005
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Bibliographic Info

Paper provided by Brock University, Department of Economics in its series Working Papers with number 0601.

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Length: 24 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:brk:wpaper:0601

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Related research

Keywords: Fisher Effect; Unit Roots; Self-Exciting Threshold Autoregression;

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References

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  1. Koustas, Zisimos, 1998. "Canadian Evidence on Long-Run Neutrality Propositions," Journal of Macroeconomics, Elsevier, vol. 20(2), pages 397-411, April.
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Citations

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Cited by:
  1. Jakob B Madsen, 2011. "A q Model of House Prices," Monash Economics Working Papers 03-11, Monash University, Department of Economics.
  2. Christopher J. Neely & David E. Rapach, 2008. "Real interest rate persistence: evidence and implications," Working Papers 2008-018, Federal Reserve Bank of St. Louis.

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