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Re-examining the real interest rate parity hypothesis (RIPH) using panel unit root tests with asymmetry and cross-section dependence

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Listed:
  • Ayşegül Çorakcı

    () (Çankaya University)

  • Furkan Emirmahmutoglu

    () (Gazi University)

  • Tolga Omay

    () (Turk Hava Kurumu University)

Abstract

Abstract This paper investigates the validity of the real interest rate parity hypothesis (RIPH) using a panel unit root approach. For this purpose, first we estimate the possible nonlinear data-generating processes of the real interest rate differential series and using these estimates determine which panel unit root test is better for analyzing the RIPH. To this end, smooth transition autoregressive and threshold autoregressive (TAR) models are estimated for two different panels of countries: G7 and post-Soviet transition economies. The results show that the data displays both strong asymmetry and high transition speed. Therefore, secondly, we propose a new panel unit root test where the alternative is stationary with asymmetric TAR adjustment, and provide their empirical power properties. Finally, we demonstrate that our newly proposed test is able to provide conclusive evidence in favor of the RIPH in contrast to the other panel unit root tests considered.

Suggested Citation

  • Ayşegül Çorakcı & Furkan Emirmahmutoglu & Tolga Omay, 2017. "Re-examining the real interest rate parity hypothesis (RIPH) using panel unit root tests with asymmetry and cross-section dependence," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 44(1), pages 91-120, February.
  • Handle: RePEc:kap:empiri:v:44:y:2017:i:1:d:10.1007_s10663-015-9312-4
    DOI: 10.1007/s10663-015-9312-4
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    Cited by:

    1. Banu Kurtaran, 2015. "Re-examining the PPP Hypothesis via Nonlinearity and Smooth Breaks," Econometrics Letters, Bilimsel Mektuplar Organizasyonu (Scientific letters), vol. 2(1), pages 1-21.
    2. repec:bmo:bmoart:v:4:y:2017:i:2:p:1-16 is not listed on IDEAS

    More about this item

    Keywords

    Real interest rate parity; Asymmetric adjustment; Nonlinear panel unit root; Cross-section dependence;

    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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