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The real interest rate differential: international evidence based on nonlinear unit root tests

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Author Info
Baharumshah, Ahmad Zubaidi
Liew, Venus Khim-Sen
Chan, Tze-Haw

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Abstract

This paper aims at testing international parity conditions by using nonlinear unit root tests advocated by Kapetanios et al. (2003, KSS). Results from the KSS tests based on 17 countries (G7 and 10 Asian countries) overwhelmingly show that the adjustment of real interest rates towards the RIP follows a nonlinear process except for the Malaysian relationships with both the US and Japan. Overall, the empirical results are in favor of RIP using the US and Japan as the center countries but only if nonlinearities are accounted for in the data generating process. Our findings confirm that interest rate differentials, like the real exchange rates reported in recent literature, display a nonlinear mean reversion process.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7300.

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Date of creation: 2007
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Handle: RePEc:pra:mprapa:7300

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Related research
Keywords: real interest parity nonlinearities unit root tests

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Find related papers by JEL classification:
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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