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The Real Interest Rate Differential: International Evidence Based On Non-Linear Unit Root Tests

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  • Ahmad Zubaidi Baharumshah
  • Venus Khim-Sen Liew
  • 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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  • Ahmad Zubaidi Baharumshah & Venus Khim-Sen Liew & Chan Tze Haw, 2009. "The Real Interest Rate Differential: International Evidence Based On Non-Linear Unit Root Tests," Bulletin of Economic Research, Wiley Blackwell, vol. 61(1), pages 83-94, January.
  • Handle: RePEc:bla:buecrs:v:61:y:2009:i:1:p:83-94
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    References listed on IDEAS

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    Cited by:

    1. David I. Harvey & Stephen J. Leybourne & Emily J. Whitehouse, "undated". "Testing for a unit root against ESTAR stationarity," Discussion Papers 17/02, University of Nottingham, Granger Centre for Time Series Econometrics.
    2. Claudiu Tiberiu Albulescu & Dominique Pépin & Aviral Kumar Tiwari, 2016. "A RE-EXAMINATION OF REAL INTEREST PARITY IN CEECs USING ‘OLD’ AND ‘NEW’ SECOND-GENERATION PANEL UNIT ROOT TESTS," Bulletin of Economic Research, Wiley Blackwell, vol. 68(2), pages 133-150, April.
    3. 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.
    4. Holmes, Mark J. & Otero, Jesús & Panagiotidis, Theodore, 2011. "Real interest parity: A note on Asian countries using panel stationarity tests," Journal of Asian Economics, Elsevier, vol. 22(6), pages 550-557.
    5. Abdullah Gulcu & Dilem Yildirim, 2018. "Smooth Breaks And Nonlinear Mean Reversion In Real Interest Parity: Evidence From East Asian Countries," ERC Working Papers 1804, ERC - Economic Research Center, Middle East Technical University, revised Feb 2018.
    6. Ching-Chuan Tsong & Cheng-Feng Lee, 2013. "Further Evidence On Real Interest Rate Equalization: Panel Information, Non-Linearities And Structural Changes," Bulletin of Economic Research, Wiley Blackwell, vol. 65, pages 85-105, May.
    7. Juan Carlos Cuestas & Barry Harrison, 2009. "Further evidence on the Real Interest Rate Parity hypothesis in Central and Eastern European Countries: unit roots and nonlinearities," Working Papers 2009/1, Nottingham Trent University, Nottingham Business School, Economics Division.
    8. 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.
    9. Chang, Ming-Jen & Su, Che-Yi, 2015. "Does real interest rate parity really hold? New evidence from G7 countries," Economic Modelling, Elsevier, vol. 47(C), pages 299-306.

    More about this item

    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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