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Nonlinear stationarity of real interest rates in the EMU countries

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  • Su Zhou

Abstract

Purpose - This paper aims to examine two hypotheses that have not been well investigated in the existing literature. One hypothesis is that the real interest rates of industrial countries tend to be mean-reverting during the current floating exchange rate period. Another hypothesis is that the real interest rates of the countries involved in forming the Euro area are more likely to behave as nonlinear stationary series than those of other industrial countries. Design/methodology/approach - The study applies the conventional linear unit root tests and recently developed nonlinear unit root tests, as well as the tests of specifying nonlinearity in time series, to the short-term real interest rates of 16 industrial countries. Findings - The results of the study provide support for both hypotheses. Practical implications - The results imply that, having adopted target-zone type stabilization policies for years, the central banks of European Monetary Union (EMU) countries were likely to have exercised monetary policies in a nonlinear way, especially in the process of meeting the requirements of joining EMU. Originality/value - The study provides stronger evidence than previous studies for the theory that real interest rates of industrial countries tend to have mean-reverting behavior. The study suggests that more active monetary policies for inflation control in the floating exchange rate period may have enhanced mean reversion in real interest rates.

Suggested Citation

  • Su Zhou, 2011. "Nonlinear stationarity of real interest rates in the EMU countries," Journal of Economic Studies, Emerald Group Publishing, vol. 38(6), pages 691-702, November.
  • Handle: RePEc:eme:jespps:v:38:y:2011:i:6:p:691-702
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    References listed on IDEAS

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    1. Richard De Abreu Lourenco & David Gruen, 1995. "Price Stickiness and Inflation," RBA Research Discussion Papers rdp9502, Reserve Bank of Australia.
    2. Döpke Jörg & Pierdzioch Christian, 2003. "Inflation and the Skewness of the Distribution of Relative Price Changes: Empirical Evidence for Germany / Inflation und die Schiefe der Verteilung relativer Preisänderungen: Empirische Evidenz für De," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, pages 136-158.
    3. A. Özlem Önder, 2004. "Forecasting Inflation in Emerging Markets by Using the Phillips Curve and Alternative Time Series Models," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 40(2), pages 71-82, March.
    4. Debelle, Guy & Lamont, Owen, 1997. "Relative Price Variability and Inflation: Evidence from U.S. Cities," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 132-152, February.
    5. A. Ozlem Onder, 2009. "The stability of the Turkish Phillips curve and alternative regime shifting models," Applied Economics, Taylor & Francis Journals, vol. 41(20), pages 2597-2604.
    6. Holly, Sean, 1997. "Relative Price Dispersion and the Rate of Inflation: The Evidence from Japan," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 12, pages 206-226.
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    Cited by:

    1. Rossen, Anja, 2011. "On the predictive content of nonlinear transformations of lagged autoregression residuals and time series observations," HWWI Research Papers 113, Hamburg Institute of International Economics (HWWI).
    2. Rossen, Anja, 2014. "On the predictive content of nonlinear transformations of lagged autoregression residuals and time series observations," HWWI Research Papers 157, Hamburg Institute of International Economics (HWWI).
    3. Yavuz, Nilgün Çil & Yilanci, Veli, 2012. "Testing For Nonlinearity In G7 Macroeconomic Time Series," Journal for Economic Forecasting, Institute for Economic Forecasting, pages 69-79.
    4. Rossen Anja, 2016. "On the Predictive Content of Nonlinear Transformations of Lagged Autoregression Residuals and Time Series Observations," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, pages 389-409.

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