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Real Interest Rate Parity: Long-Run and Short-Run Analysis Using Wavelets

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  • Keshab Shrestha

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  • Kok Tan

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Abstract

In this article, long-run and short-run relationships among real interest rates in G-7 countries are empirically analyzed. The evidence suggests the existence of long-run relationships among these real interest rates. However, the long-run relationship is not an equality relationship. Short-run relationships are estimated using dynamic simultaneous equation models. They reveal that the real interest rates of non-U.S. G-7 countries react and adjust to long-run disequilibrium conditions. A more detailed analysis based on wavelet transform indicates the existence of both short-run and long-run relationships; however, strict interest rate parity does not seem to hold true. Copyright Springer Science + Business Media, Inc. 2005

Suggested Citation

  • Keshab Shrestha & Kok Tan, 2005. "Real Interest Rate Parity: Long-Run and Short-Run Analysis Using Wavelets," Review of Quantitative Finance and Accounting, Springer, vol. 25(2), pages 139-157, September.
  • Handle: RePEc:kap:rqfnac:v:25:y:2005:i:2:p:139-157
    DOI: 10.1007/s11156-005-4246-8
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    References listed on IDEAS

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    Cited by:

    1. Özmen, M. Utku & Yılmaz, Erdal, 2017. "Co-movement of exchange rates with interest rate differential, risk premium and FED policy in “fragile economies”," Emerging Markets Review, Elsevier, vol. 33(C), pages 173-188.
    2. Antonis Michis, 2015. "Multiscale Analysis of the Liquidity Effect in the UK Economy," Computational Economics, Springer;Society for Computational Economics, vol. 45(4), pages 615-633, April.
    3. Song, Nianfu & Chang, Sun Joseph & Aguilar, Francisco X., 2011. "U.S. softwood lumber demand and supply estimation using cointegration in dynamic equations," Journal of Forest Economics, Elsevier, vol. 17(1), pages 19-33, January.

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