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On Mean Reversion in Real Interest Rates: An Application of Threshold Cointegtation

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Author Info

  • Jumah, Adusei

    (Department of Economics at BWZ and European Central Bank)

  • Kunst, Robert M.

    (Department of Economics and Finance, Institute for Advanced Studies and Department of Economics at BWZ)

Abstract

Using data from Germany, Japan, UK, and the U.S., we explore possible threshold cointegration in nominal short- and long-run interest rates with corresponding inflation rates. Traditional cointegration implies perfect mean reversion in real rates and hence confirms the Fisher hypothesis. Threshold cointegration accounts for the possibility that this mean reversion is active only conditional on certain threshold values in the observed variables. We investigate whether findings of such effects can be exploited for interest rate prediction.

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File URL: http://www.ihs.ac.at/publications/eco/es-109.pdf
File Function: First version, 2002
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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 109.

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Length: 27 pages
Date of creation: Jan 2002
Date of revision:
Handle: RePEc:ihs:ihsesp:109

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Related research

Keywords: Nonlinear time series; Fisher equation; Yield spread; Forecasting;

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References

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  1. Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
  2. Beyer, Andreas & Farmer, Roger E. A., 2002. "Natural rate doubts," Working Paper Series 0121, European Central Bank.
  3. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
  4. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  5. Choi, In & Chul Ahn, Byung, 1998. "Testing the null of stationarity for multiple time series," Journal of Econometrics, Elsevier, vol. 88(1), pages 41-77, November.
  6. Nathan S. Balke & Thomas B. Fomby, 1992. "Threshold cointegration," Research Paper 9209, Federal Reserve Bank of Dallas.
    • Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August.
  7. Wu, Yangru & Zhang, Hua, 1997. " Do Interest Rates Follow Unit-Root Processes? Evidence from Cross-Maturity Treasury Bill Yields," Review of Quantitative Finance and Accounting, Springer, vol. 8(1), pages 69-81, January.
  8. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
  9. Peter C.B. Phillips, 1998. "Econometric Analysis of Fisher's Equation," Cowles Foundation Discussion Papers 1180, Cowles Foundation for Research in Economics, Yale University.
  10. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, October.
  11. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Interest Rates – 3
    by Clive Jones in Business Forecasting on 2014-03-25 22:44:29
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Cited by:
  1. Rokon Bhuiyan, 2013. "Inflationary expectations and monetary policy: evidence from Bangladesh," Empirical Economics, Springer, vol. 44(3), pages 1155-1169, June.
  2. Kunst, Robert M., 2002. "Decision Maps for Bivariate Time Series with Potential Thrshold Cointegration," Economics Series 121, Institute for Advanced Studies.

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