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Unit roots and persistence in the nominal interest rate: a confirmatory analysis applied to the OECD

  • Diego Romero-Ávila
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    This paper investigates the stochastic properties of long-term and short-term nominal interest rates for the OECD over the post-war era. For that purpose, we employ univariate unit root tests as well as panel unit root and stationarity tests that explicitly allow for cross-sectional dependence. Overall, we find overwhelming evidence that the nominal interest rate contains a unit root, which may be driven by a stochastic common factor. The computation of half-lives through impulse-response functions also points to a high degree of persistence. This has important implications for the cointegration analysis of the Fisher equation, the uncovered interest parity, and the term structure.

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    Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

    Volume (Year): 40 (2007)
    Issue (Month): 3 (August)
    Pages: 980-1007

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    Handle: RePEc:cje:issued:v:40:y:2007:i:3:p:980-1007
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