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

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  • Juan Carlos Cuestas
  • Barry Harrison

Abstract

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.

Suggested Citation

  • Juan Carlos Cuestas & Barry Harrison, 2010. "Further Evidence on the Real Interest Rate Parity Hypothesis in Central and East European Countries: Unit Roots and Nonlinearities," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(6), pages 22-39, November.
  • Handle: RePEc:mes:emfitr:v:46:y:2010:i:6:p:22-39
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Claudiu Tiberiu Albulescu & Dominique Pépin & Aviral Kumar Tiwari, 2016. "A RE-EXAMINATION OF REAL INTEREST PARITY IN CEECs USING ‘OLD’ AND ‘NEW’ SECOND-GENERATION PANEL UNIT ROOT TESTS," Bulletin of Economic Research, Wiley Blackwell, vol. 68(2), pages 133-150, April.
    2. Pelin Oge Guney & Erdinc Telatar & Mubariz Hasanov, 2012. "Time Series Behaviour of the Real Interest Rates in Transition Economies," Hacettepe University Department of Economics Working Papers 20125, Hacettepe University, Department of Economics.
    3. Claudiu Tiberiu Albulescu & Dominique Pepin & Aviral Kumar Tiwari, 2014. "A re-examination of real interest parity in CEECs using old and new generations of panel unit root tests," Papers 1403.3627, arXiv.org.
    4. repec:bla:etrans:v:25:y:2017:i:4:p:663-680 is not listed on IDEAS
    5. Burak Saltoglu & M. Ege Yazgan, 2012. "The Role of Regime Shifts in the Term Structure of Interest Rates: Further Evidence from an Emerging Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(S5), pages 48-63, November.
    6. Öge Güney, Pelin & Hasanov, Mübariz, 2014. "Real interest rate parity hypothesis in post-Soviet countries: Evidence from unit root tests," Economic Modelling, Elsevier, vol. 36(C), pages 120-129.
    7. Jiang, Chun & Jian, Na & Liu, Tie-Ying & Su, Chi-Wei, 2016. "Purchasing power parity and real exchange rate in Central Eastern European countries," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 349-358.
    8. Heeho Kim & JooEun Cho, 2011. "A Test of the Revised Interest Parity in China and Asian Emerging Markets," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 47(0), pages 23-41, September.
    9. Abdullah Gulcu & Dilem Yildirim, 2018. "Smooth Breaks And Nonlinear Mean Reversion In Real Interest Parity: Evidence From East Asian Countries," ERC Working Papers 1804, ERC - Economic Research Center, Middle East Technical University, revised Feb 2018.
    10. Baharumshah, Ahmad Zubaidi & Soon, Siew-Voon & Boršič, Darja, 2013. "Real interest parity in Central and Eastern European countries: Evidence on integration into EU and the US markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 25(C), pages 163-180.
    11. Burak Saltoglu & M. Ege Yazgan, 2012. "The Role of Regime Shifts in the Term Structure of Interest Rates: Further Evidence from an Emerging Market," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 48(S5), pages 48-63, November.

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