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Further evidence on the Real Interest Rate Parity hypothesis in Central and Eastern European Countries: unit roots and nonlinearities

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Author Info
Juan Carlos Cuestas
Barry Harrison

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Abstract

This paper analyses the empirical fulfilment of the Real Interest Rate Parity (RIRP) theory for a pool of Central and Eastern European Countries. To do so, we apply the recently developed Ng and Perron (2001) unit root tests, that are corrected versions of existing unit root tests and the Kapetanios et al. (2003) unit root test which generalises the alternative hypothesis to the globally stationary smooth transition autoregression model. Our results point to the existence of evidence in favour of the empirical fulfilment of the RIRP, in particular, when taking into account the possibility of nonlinearities in the real interest rate differential.

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Paper provided by Nottingham Trent University, Nottingham Business School, Economics Division in its series Working Papers with number 2009/1.

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Date of creation: Jan 2009
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Handle: RePEc:nbs:wpaper:2009/1

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For technical questions regarding this item, or to correct its listing, contact: (Juan Carlos Cuestas).

Related research
Keywords: Real Interest Rate parity; Unit Roots; nonlinearities; Central and East Europe.;

Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
F15 - International Economics - - Trade - - - Economic Integration

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  1. Mark P. Taylor & Lucio Sarno, 2004. "International real interest rate differentials, purchasing power parity and the behaviour of real exchange rates: the resolution of a conundrum," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(1), pages 15-23. [Downloadable!]
  2. Mishkin, Frederic S, 1984. " Are Real Interest Rates Equal across Countries? An Empirical Investigation of International Parity Conditions," Journal of Finance, American Finance Association, vol. 39(5), pages 1345-57, December. [Downloadable!] (restricted)
    Other versions:
  3. 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. [Downloadable!] (restricted)
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  4. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February. [Downloadable!] (restricted)
  5. Baharumshah, Ahmad Zubaidi & Haw, Chan Tze & Fountas, Stilianos, 2005. "A panel study on real interest rate parity in East Asian countries: Pre- and post-liberalization era," Global Finance Journal, Elsevier, vol. 16(1), pages 69-85, August. [Downloadable!] (restricted)
  6. Mohsen Bahmani-Oskooee & Abera Gelan, 2007. "Real and nominal effective exchange rates for African countries," Applied Economics, Taylor and Francis Journals, vol. 39(8), pages 961-979. [Downloadable!] (restricted)
  7. Bahmani-Oskooee, Mohsen & Kutan, Ali M. & Zhou, Su, 2007. "Testing PPP in the non-linear STAR framework," Economics Letters, Elsevier, vol. 94(1), pages 104-110, January. [Downloadable!] (restricted)
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  9. Mariam Camarero & Josep Lluis Carrion-i-Silvestre & Cecilio Tamarit, 2006. "New evidence of the real interest rate parity for OECD countries using panel unit root tests with breaks," Working Papers CREAP2006-14, Xarxa de Referència en Economia Aplicada (XREAP), revised Dec 2006. [Downloadable!]
    Other versions:
  10. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March. [Downloadable!] (restricted)
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  11. Nelson C. Mark & Young-Kyu Moh, 2005. "The real exchange rate and real interest differentials: the role of nonlinearities," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(4), pages 323-335. [Downloadable!]
  12. Juselius, Katarina, 1995. "Do purchasing power parity and uncovered interest rate parity hold in the long run? An example of likelihood inference in a multivariate time-series model," Journal of Econometrics, Elsevier, vol. 69(1), pages 211-240, September. [Downloadable!] (restricted)
  13. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November. [Downloadable!] (restricted)
    Other versions:
  14. Michael G. Arghyrou & Andros Gregoriou & Alexandros Kontonikas, 2007. "Do real interest rates converge? Evidence from the European Union," Working Papers 2007_21, Department of Economics, University of Glasgow. [Downloadable!]
    Other versions:
  15. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
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  16. Ferreira, Alex Luiz & Leon-Ledesma, Miguel A., 2007. "Does the real interest parity hypothesis hold? Evidence for developed and emerging markets," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 364-382, April. [Downloadable!] (restricted)
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  17. Bhargava, Alok, 1986. "On the Theory of Testing for Unit Roots in Observed Time Series," Review of Economic Studies, Blackwell Publishing, vol. 53(3), pages 369-84, July. [Downloadable!] (restricted)
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