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Real Interest Parity in New Europe

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Author Info

  • Robert J. Sonora

    ()
    (Department of Economics, School of Business Administration, Fort Lewis College)

  • Josip Tica

    ()
    (Faculty of Economics and Business, University of Zagreb)

Abstract

In this paper we investigate the real interest parity condition in ten Eastern European transition countries during 1997-2009 period. Our sample is interesting for three reasons: It covers the second stage of economic transition in the aftermath of the collapse of socialism; the establishment of Euroland at the turn of the century: and enlargement of Euroland to include the Eastern European countries of Slovenia and Slovakia. The data enables us to investigate how the introduction of market mechanisms in the early nineties and the establishment and enlargement of Euroland acted on real interest rate convergence. We test the real interest parity condition with unit root test with and without structural breaks. Inflationary expectations are estimated in two ways: (i) under assumption of rational expectations with ex-post inflation rates and (ii) with ex-ante estimated inflation expectation using ARIMA/ARCH model. Preliminary results suggest that there is a strong evidence of stationarity and relatively weaker evidence of structural breaks.

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File URL: http://web.efzg.hr/repec/pdf/Clanak%2010-11.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Faculty of Economics and Business, University of Zagreb in its series EFZG Working Papers Series with number 1011.

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Length: 21
Date of creation: 08 Dec 2010
Date of revision:
Handle: RePEc:zag:wpaper:1011

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Related research

Keywords: Real interest parity condition; Transition countries; Unit root test; Structural breaks;

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References

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  1. Frankel, Jeffrey A. & Poonawala, Jumana, 2009. "The Forward Market in Emerging Currencies: Less Biased than in Major Currencies," Scholarly Articles 4448888, Harvard Kennedy School of Government.
  2. Junsoo Lee & Mark C. Strazicich, 2004. "Minimum LM Unit Root Test with One Structural Break," Working Papers 04-17, Department of Economics, Appalachian State University.
  3. Arghyrou, Michael G & Gregoriou, Andros & Kontonikas, Alexandros, 2007. "Do real interest rates converge? Evidence from the European Union," Cardiff Economics Working Papers E2007/26, Cardiff University, Cardiff Business School, Economics Section.
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Cited by:
  1. 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," Papers 1403.3627, arXiv.org.
  2. Liu, Lin & Chang, Hsu-Ling & Su, Chi-Wei & Jiang, Chun, 2013. "Real interest rate parity in East Asian countries based on China with flexible Fourier stationary test," Japan and the World Economy, Elsevier, vol. 25, pages 52-58.
  3. Su, Chi-Wei & Chang, Hsu-Ling & Liu, Lin, 2012. "Real interest rate parity with Flexible Fourier stationary test for Central and Eastern European countries," Economic Modelling, Elsevier, vol. 29(6), pages 2719-2723.
  4. Jiang, Chun & Li, Xiao-Lin & Chang, Hsu-Ling & Su, Chi-Wei, 2013. "Uncovered interest parity and risk premium convergence in Central and Eastern European countries," Economic Modelling, Elsevier, vol. 33(C), pages 204-208.

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