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An Encompassing Test of Real Interest Rate Equalization

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  • Aaron Smallwood
  • Stefan C. Norrbin

Abstract

Much confusion about the real interest rate connection amongst different countries may result from a narrow approach to analyzing the data. Using an encompassing methodology that accommodates many different types of times-series processes, we find that real interest rates are mean-reverting long-memory variables. We show that cointegration methodology can often fail in this environment. Using a more general approach, we detect a limited connection between real interest rates across countries. In particular, Germany is connected with several European countries, but the US is connected only with Canada and possibly the United Kingdom. Copyright © 2008 The Authors; Journal compilation © 2008 Blackwell Publishing Ltd.

Suggested Citation

  • Aaron Smallwood & Stefan C. Norrbin, 2008. "An Encompassing Test of Real Interest Rate Equalization," Review of International Economics, Wiley Blackwell, vol. 16(1), pages 114-126, February.
  • Handle: RePEc:bla:reviec:v:16:y:2008:i:1:p:114-126
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    References listed on IDEAS

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    Cited by:

    1. Patrick Minford & David Peel, 2007. "On the Equality of Real Interest Rates Across Borders in Integrated Capital Markets," Open Economies Review, Springer, vol. 18(1), pages 119-125, February.
    2. Antonio Ribba, 2011. "On some neglected implications of the Fisher effect," Empirical Economics, Springer, vol. 40(2), pages 451-470, April.
    3. Zodrow, George R., 2010. "Capital Mobility and Capital Tax Competition," National Tax Journal, National Tax Association;National Tax Journal, vol. 63(4), pages 865-901, December.
    4. Shih-Chuan Tsai, 2012. "Liquidity and Yield Curve Estimation," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(5), pages 4-24, September.
    5. Shih-Chuan Tsai, 2012. "Liquidity and Yield Curve Estimation," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(5), pages 4-24, September.

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