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Long- and short-term interest rates in 19 countries: Tests of cointegration and parameter instability

  • A. Arize
  • J. Malindretos
  • Z. Obi
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    This paper examines the long-run relationship between short-term and long-term interest rates (both nominal and real) in 19 countries, and explores the possibility that the relationship is statistically stable using Lc, MeanF, and SupF statistics suggested by Hansen [1992]. Empirical results obtained from various cointegration techniques (Johansen, Phillips and Hansen, Stock and Watson, and Park) and quarterly data (1973–1998) show considerable support for the expectations hypothesis in all countries (except the United Kingdom). In a majority of cases, it is also found that a stable relationship exists between the short-term and long-term interest rates. Copyright International Atlantic Economic Society 2002

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    Article provided by International Atlantic Economic Society in its journal Atlantic Economic Journal.

    Volume (Year): 30 (2002)
    Issue (Month): 2 (June)
    Pages: 105-120

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    Handle: RePEc:kap:atlecj:v:30:y:2002:i:2:p:105-120
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    1. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
    2. MacDonald, Ronald & Speight, Alan E H, 1988. "The Term Structure of Interest Rates in the UK," Bulletin of Economic Research, Wiley Blackwell, vol. 40(4), pages 287-99, October.
    3. Arize, A. C., 1996. "Cointegration test of a long-run relation between the trade balance and the terms of trade in sixteen countries," The North American Journal of Economics and Finance, Elsevier, vol. 7(2), pages 203-215.
    4. James G. MacKinnon, 1990. "Critical Values for Cointegration Tests," Working Papers 1227, Queen's University, Department of Economics.
    5. Mark P. Taylor, 1991. "Modelling the Yield Curve," IMF Working Papers 91/134, International Monetary Fund.
    6. McFadyen, James & Pickerill, Karen & Devaney, Mike, 1991. "The expectations hypothesis of the term structure: More evidence," Journal of Economics and Business, Elsevier, vol. 43(1), pages 79-85, February.
    7. Park, Joon Y, 1992. "Canonical Cointegrating Regressions," Econometrica, Econometric Society, vol. 60(1), pages 119-43, January.
    8. Henrik Hansen & Søren Johansen, 1992. "Recursive Estimation in Cointegrated VAR-Models," Discussion Papers 92-13, University of Copenhagen. Department of Economics.
    9. Phillips, Peter C B & Hansen, Bruce E, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 99-125, January.
    10. Wallace, Myles S & Warner, John T, 1993. "The Fisher Effect and the Term Structure of Interest Rates: Tests of Cointegration," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 320-24, May.
    11. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
    12. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
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    15. Richard, Scott F., 1978. "An arbitrage model of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 6(1), pages 33-57, March.
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