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Further Evidence on the Real Interest Rate Parity Hypothesis in Central and East European Countries: Unit Roots and Nonlinearities

Listed author(s):
  • Juan Carlos Cuestas
  • Barry Harrison

This paper analyzes the empirical fulfillment of the real interest rate parity (RIRP) theory for a pool of central and east European countries. To do so, we apply the recently developed Ng and Perron (2001) unit root tests, which are corrected versions of existing unit root tests, and the Kapetanios et al. (2003) unit root test, which generalizes the alternative hypothesis to the globally stationary smooth transition autoregression model. We find evidence in favor of the empirical fulfillment of RIRP, particularly when taking into account the possibility of nonlinearities in the real interest rate differential.

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Article provided by M.E. Sharpe, Inc. in its journal Emerging Markets Finance and Trade.

Volume (Year): 46 (2010)
Issue (Month): 6 (November)
Pages: 22-39

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Handle: RePEc:mes:emfitr:v:46:y:2010:i:6:p:22-39
Contact details of provider: Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=111024

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  1. Alok Bhargava, 1986. "On the Theory of Testing for Unit Roots in Observed Time Series," Review of Economic Studies, Oxford University Press, vol. 53(3), pages 369-384.
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  4. Arghyrou, Michael G & Gregoriou, Andros & Kontonikas, Alexandros, 2007. "Do real interest rates converge? Evidence from the European Union," Cardiff Economics Working Papers E2007/26, Cardiff University, Cardiff Business School, Economics Section.
  5. Holmes, Mark J., 2002. "Does long-run real interest parity hold among EU countries? Some new panel data evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(4), pages 733-746.
  6. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Alex Luiz Ferreira & Miguel León-Ledesma, 2003. "Does the Real Interest Parity Hypothesis Hold? Evidence for Developed and Emerging Markets," Studies in Economics 0301, School of Economics, University of Kent.
  8. Mishkin, Frederic S, 1984. " Are Real Interest Rates Equal across Countries? An Empirical Investigation of International Parity Conditions," Journal of Finance, American Finance Association, vol. 39(5), pages 1345-1357, December.
  9. Mohsen Bahmani Oskooee & Magda Kandil, 2007. "Real and nominal effective exchange rates in MENA countries: 1970-2004," Applied Economics, Taylor & Francis Journals, vol. 39(19), pages 2489-2501.
  10. Bahmani-Oskooee, Mohsen & Kutan, Ali M. & Zhou, Su, 2007. "Testing PPP in the non-linear STAR framework," Economics Letters, Elsevier, vol. 94(1), pages 104-110, January.
  11. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-836, July.
  12. Cuestas, Juan Carlos & Harrison, Barry, 2010. "Inflation persistence and nonlinearities in Central and Eastern European countries," Economics Letters, Elsevier, vol. 106(2), pages 81-83, February.
  13. Baharumshah, Ahmad Zubaidi & Haw, Chan Tze & Fountas, Stilianos, 2005. "A panel study on real interest rate parity in East Asian countries: Pre- and post-liberalization era," Global Finance Journal, Elsevier, vol. 16(1), pages 69-85, August.
  14. Mohsen Bahmani-Oskooee & Abera Gelan, 2007. "Real and nominal effective exchange rates for African countries," Applied Economics, Taylor & Francis Journals, vol. 39(8), pages 961-979.
  15. Juselius, Katarina, 1995. "Do purchasing power parity and uncovered interest rate parity hold in the long run? An example of likelihood inference in a multivariate time-series model," Journal of Econometrics, Elsevier, vol. 69(1), pages 211-240, September.
  16. PERRON, Pierre & RODRIGUEZ, Gabriel, 1998. "GLS Detrending, Efficient Unit Root Tests and Structural Change," Cahiers de recherche 9809, Universite de Montreal, Departement de sciences economiques.
  17. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
  18. Bierens, Herman J, 2000. "Nonparametric Nonlinear Cotrending Analysis, with an Application to Interest and Inflation in the United States," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(3), pages 323-337, July.
  19. Phylaktis, Kate, 1999. "Capital market integration in the Pacific Basin region: an impulse response analysis," Journal of International Money and Finance, Elsevier, vol. 18(2), pages 267-287, February.
  20. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
  21. Mark P. Taylor & Lucio Sarno, 2004. "International real interest rate differentials, purchasing power parity and the behaviour of real exchange rates: the resolution of a conundrum," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(1), pages 15-23.
  22. Nelson C. Mark & Young-Kyu Moh, 2005. "The real exchange rate and real interest differentials: the role of nonlinearities," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(4), pages 323-335.
  23. Jyh-Lin Wu & Show-Lin Chen, 1998. "A Re-examination of Real Interest Rate Parity," Canadian Journal of Economics, Canadian Economics Association, vol. 31(4), pages 837-851, November.
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