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Does the Real Interest Parity Hypothesis Hold? Evidence for Developed and Emerging Markets

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Author Info
Alex Luiz Ferreira ()
Miguel León-Ledesma ()

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Abstract

Evidence is presented on the Real Interest Parity Hypothesis for a set of emerging and developed countries. This is done by carrying out a set of unit-root tests on the real interest differentials with respect to Germany and the US. Our results support the hypothesis of a rapid reversion towards a zero differeential for developed countries and towards a positive one for emerging markets. An important result is that this adjustment tends to be highly asymmetric and markedly different for developed and emerging countries. Our evidence reveals a high degree of market integratioin for developed countries and highlights the importance of risk premia for emerging markets.

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Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number 0301.

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Date of creation: Aug 2003
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Handle: RePEc:ukc:ukcedp:0301

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Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
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Related research
Keywords: Real Interest Rate Differentials; Market Integration; Unit Roots; Asymmetric Adjustment;

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Find related papers by JEL classification:
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Melecky, Ales & Melecky, Martin, 2008. "From Inflation to Exchange Rate Targeting: Estimating the Stabilization Effects," MPRA Paper 10844, University Library of Munich, Germany. [Downloadable!]
  2. repec:bep:mactop:v:8:y:2008:i:1:p:1508-1508 is not listed on IDEAS
    Other versions:
  3. Somchai Amornthum & Carl Bonham, 2008. "Financial Integration in the Pacific Basin Region: RIP by PANIC Attack?," Working Papers 200802, University of Hawaii at Manoa, Department of Economics. [Downloadable!]
  4. Melecky, Martin & Najdov, Evgenij, 2008. "Comparing constraints to economic stabilization in Macedonia and Slovakia: macro estimates with micro narratives," Policy Research Working Paper Series 4691, The World Bank. [Downloadable!]
    Other versions:
  5. George Bagdatoglou & Alexandros Kontonikas, 2009. "A New Test of the Real Interest Rate Parity Hypothesis: Bounds Approach and Structural Breaks," Working Papers 2009_17, Department of Economics, University of Glasgow. [Downloadable!]
  6. Sofiane H. Sekioua, 2004. "Real interest parity (RIP) over the 20th century: New evidence based on confidence intervals for the dominant root and half-lives of shocks," Money Macro and Finance (MMF) Research Group Conference 2004 91, Money Macro and Finance Research Group. [Downloadable!]
  7. Alex Luiz Ferreira, 2004. "Are Real Interest Differentials Caused by Frictions in Goods or Assets Markets, Real or Nominal Shocks?," Studies in Economics 0407, Department of Economics, University of Kent. [Downloadable!]
  8. Abhisek Banerjee & Manmohan Singh, 2006. "Testing Real Interest Parity in Emerging Markets," IMF Working Papers 06/249, International Monetary Fund. [Downloadable!]
  9. 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:
  10. Mariam Camarero & Josep Lluis Carrion Silvestre & Cecilio Tamarit, 2006. "New evidence of the real interest rate parity for OECD countries using panel unit root tests with breaks," Working Papers in Economics 159, Universitat de Barcelona. Espai de Recerca en Economia. [Downloadable!]
    Other versions:
  11. Aikaterini Karadimitropoulou & Miguel A. León-Ledesma, 2009. "Sources of Current Account Fluctuations in Industrialized Countries," Studies in Economics 0910, Department of Economics, University of Kent. [Downloadable!]
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