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

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

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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Keywords: real interest parity; nonlinearities; unit root tests;

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Cited by:
  1. Mark J. Holmes & Jesús Otero & Theodore Panagiotidis, 2011. "Real Interest Parity: A Note on Asian Countries Using Panel Stationarity Tests," Working Paper Series, The Rimini Centre for Economic Analysis 23_11, The Rimini Centre for Economic Analysis.
  2. Claudiu Tiberiu Albulescu & Dominique Pepin & Aviral Kumar Tiwari, 2014. "A RE-EXAMINATION OF REAL INTEREST PARITY IN CEECs USING OLD AND NEW GENERATIONS OF PANEL UNIT ROOT TESTS," Working Papers hal-00959475, HAL.
  3. Baharumshah, Ahmad Zubaidi & Soon, Siew-Voon & Hamzah, Nor Aishah, 2013. "Parity reversion in real interest rate in the Asian countries: Further evidence based on local-persistent model," Economic Modelling, Elsevier, vol. 35(C), pages 634-642.

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