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The Long Memory Story Of Real Interest Rates. Can It Be Supported?

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  • Ivan Paya

    ()
    (Universidad de Alicante)

  • Agustín Duarte

    (Universidad de Alicante)

  • Ioannis A. Venetis

    (Centre of Planning and Economic Research (KEPE))

Abstract

This papers finds evidence of fractional integration for a number of monthly ex post real interest rate series using the GPH semiparametric estimator on data from fourteen European countries and the US. However, we pose empirical questions on certain time series requirements that emerge from fractional integration and we find that they do not hold pointing to ¿spurious¿ long memory and casting doubts with respect to the theoretical origins of long memory in our sample. Common stochastic trends expressed as the sum of stationary past errors do not seem appropriate as an explanation of real interest rate covariation. From an economic perspective, our results suggest that most European countries show higher speed of real interest rate equalization with Germany rather than the US.

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Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2005-01.

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Length: 20 pages
Date of creation: Jan 2005
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Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2005-01

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Keywords: Real interest rate; long memory; fractional integration;

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  1. Duarte, Agustin & Holden, Ken, 2003. "The business cycle in the G-7 economies," International Journal of Forecasting, Elsevier, vol. 19(4), pages 685-700.
  2. Baxter, Marianne, 1994. "Real exchange rates and real interest differentials: Have we missed the business-cycle relationship?," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 5-37, February.
  3. Christensen, Michael, 2000. "Uncovered interest parity and policy behavior: new evidence," Economics Letters, Elsevier, vol. 69(1), pages 81-87, October.
  4. Christensen, Michael, 2000. "Uncovered Interest Parity and Policy Behavior New Evidence," Finance Working Papers 00-2, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  5. Adrian W. Throop, 1994. "International financial market integration and linkages of national interest rates," Economic Review, Federal Reserve Bank of San Francisco, pages 3-18.
  6. Wynne, Mark A & Koo, Jahyeong, 2000. "Business Cycles under Monetary Union: A Comparison of the EU and US," Economica, London School of Economics and Political Science, vol. 67(267), pages 347-74, August.
  7. Tsay, Wen-Jen, 2000. "Long memory story of the real interest rate," Economics Letters, Elsevier, vol. 67(3), pages 325-330, June.
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