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

Author

Listed:
  • Diego Romero-Ávila

Abstract

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.

Suggested Citation

  • Diego Romero-Ávila, 2007. "Unit roots and persistence in the nominal interest rate: a confirmatory analysis applied to the OECD," Canadian Journal of Economics, Canadian Economics Association, vol. 40(3), pages 980-1007, August.
    • Handle: RePEc:cje:issued:v:40:y:2007:i:3:p:980-1007
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    Cited by:

    1. István Ábel & Pierre Siklos, 2023. "Macroeconomic Risks and Monetary Policy in Central European Countries: Parallels in the Czech Republic, Hungary, and Poland," Risks, MDPI, vol. 11(11), pages 1-26, November.
    2. Beechey, Meredith & Österholm, Pär & Poon, Aubrey, 2023. "Estimating the US trend short-term interest rate," Finance Research Letters, Elsevier, vol. 55(PA).
    3. Lindenberg, Nannette & Westermann, Frank, 2012. "Common trends and common cycles among interest rates of the G7-countries," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1125-1140.

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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