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Long-Term Persistence in the Real Interest Rate: Some Evidence of a Fractional Unit Root

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  • Lai, Kon S

Abstract

This study examines the long-term persistence in ex ante real interest rates. According to the long-run Fisher effect, ex ante real rates--the difference between nominal rates and expected inflation--should be mean-reverting and have no unit root. Empirical evidence on mean reversion has been mixed and less than supportive, however. Prior analyses are restricted to integer orders of integration only. This study provides a re-appraisal of the evidence using fractional integration analysis. In addition, expected inflation is measured by inflation forecasts and not just by realized inflation rates. Empirical results strongly support that ex ante real interest rates exhibit mean reversion, but in a special manner not captured by the usual stationary processes. This finding is also corroborated by empirical results based upon ex post real rates. Copyright @ 1997 by John Wiley & Sons, Ltd. All rights reserved.

Suggested Citation

  • Lai, Kon S, 1997. "Long-Term Persistence in the Real Interest Rate: Some Evidence of a Fractional Unit Root," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(3), pages 225-235, July.
  • Handle: RePEc:ijf:ijfiec:v:2:y:1997:i:3:p:225-35
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    Cited by:

    1. Guglielmo Maria Caporale & Luis Alberiko Gil-Alaña, 2011. "Interest rate dynamics in Kenya," NCID Working Papers 10/2011, Navarra Center for International Development, University of Navarra.
    2. Kasimir Kaliva, 2008. "The Fisher effect, survey data and time-varying volatility," Empirical Economics, Springer, vol. 35(1), pages 1-10, August.
    3. Christopher J. Neely & David E. Rapach, 2008. "Real interest rate persistence: evidence and implications," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 609-642.
    4. 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.
    5. Caporale, Guglielmo Maria & Carcel, Hector & Gil-Alana, Luis, 2017. "Central bank policy rates: Are they cointegrated?," International Economics, Elsevier, vol. 152(C), pages 116-123.
    6. Michał Markun & Anna Mospan, 2015. "Stationarity and persistence of the term premia in the Polish money market," NBP Working Papers 227, Narodowy Bank Polski, Economic Research Department.
    7. 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.
    8. Guglielmo Maria Caporale & Luis A. Gil-Alana, 2016. "Persistence and cyclical dependence in the monthly euribor rate," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 40(1), pages 157-171, January.
    9. Arnold, Stephan & Auer, Benjamin R., 2015. "What do scientists know about inflation hedging?," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 187-214.
    10. repec:fgv:epgrbe:v:65:n:3:a:4 is not listed on IDEAS
    11. repec:eee:finana:v:52:y:2017:i:c:p:1-8 is not listed on IDEAS
    12. Karanasos, M. & Sekioua, S.H. & Zeng, N., 2006. "On the order of integration of monthly US ex-ante and ex-post real interest rates: New evidence from over a century of data," Economics Letters, Elsevier, vol. 90(2), pages 163-169, February.
    13. Lai, Kon S., 2008. "The puzzling unit root in the real interest rate and its inconsistency with intertemporal consumption behavior," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 140-155, February.
    14. repec:agr:journl:v:3(612):y:2017:i:3(612):p:71-82 is not listed on IDEAS
    15. da Silva, Cleomar Gomes & Leme, Maria Carolina da Silva, 2011. "An Analysis of the Degrees of Persistence of Inflation, Inflation Expectations and Real Interest Rate in Brazil," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 65(3), September.
    16. Kanas, Angelos, 2008. "On real interest rate dynamics and regime switching," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2089-2098, October.
    17. repec:eee:jpolmo:v:39:y:2017:i:5:p:775-789 is not listed on IDEAS
    18. Caporale, Guglielmo Maria & Gil-Alana, Luis A., 2017. "Persistence and cycles in the us federal funds rate," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 1-8.
    19. Cleomar Gomes da Silva & Flávio Vilela Vieira, 2014. "BRICS countries: real interest rates and long memory," Economics Bulletin, AccessEcon, vol. 34(1), pages 409-419.

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