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Fin de Siecle Real Interest Parity

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  • Eiji Fujii
  • Menzie D. Chinn

Abstract

We evaluate the recent evidence for real interest parity, focusing on long-term yields. Examining the data on financial instruments of various maturities across the G7 countries, we find substantial differences in the degree of real interest equalization measured at different horizons. In general, real interest parity holds better at long horizons than at short. This empirical result is robust to alternative ways of modeling expected inflation rates. Considering the relevance of long-term yields for the investment decisions of firms, our findings imply that the degree of capital mobility among the G-7 economies may be greater than previously thought.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7880.

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Date of creation: Sep 2000
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Publication status: published as Fujii, Eiji and Menzie Chinn. "Fin De Siecle Real Interest Parity," Journal of International Financial Markets, Institutions and Money, 2001, v11(3-4,Sep), 289-308.
Handle: RePEc:nbr:nberwo:7880

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  1. Mark P. Taylor & Ronald MacDonald, 1991. "Exchange Rate Economics: A Survey," IMF Working Papers 91/62, International Monetary Fund.
  2. Frederic S. Mishkin, 1982. "Are Real Interest Rates Equal Across Countries? An Empirical Investigation of International Parity Conditions," NBER Working Papers 1048, National Bureau of Economic Research, Inc.
  3. Cumby, Robert E. & Mishkin, Frederic S., 1986. "The international linkage of real interest rates: The European-US connection," Journal of International Money and Finance, Elsevier, vol. 5(1), pages 5-23, March.
  4. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
  5. Mark, Nelson C., 1985. "Some evidence on the international inequality of real interest rates," Journal of International Money and Finance, Elsevier, vol. 4(2), pages 189-208, June.
  6. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  7. Guy Meredith & Menzie D. Chinn, 1998. "Long-Horizon Uncovered Interest Rate Parity," NBER Working Papers 6797, National Bureau of Economic Research, Inc.
  8. Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061546, December.
  9. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  10. Alexius, Annika, 2001. "Uncovered Interest Parity Revisited," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 505-17, August.
  11. Jorion, Philippe, 1996. "Does real interest parity hold at longer maturities?," Journal of International Economics, Elsevier, vol. 40(1-2), pages 105-126, February.
  12. Robert E. Cumby & Maurice Obstfeld, 1982. "International Interest-Rate and Price-Level Linkages Under Flexible Exchange Rates: A Review of Recent Evidence," NBER Working Papers 0921, National Bureau of Economic Research, Inc.
  13. Adrian Blundell-Wignall & Frank Browne, 1991. "Increasing Financial Market Integration, Real Exchange Rates and Macroeconomic Adjustment," OECD Economics Department Working Papers 96, OECD Publishing.
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