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Testing Real Interest Rate Parity for EU5 Countries: 200 Years of Data, Non-normality, Non-linearity and Breaks

Author

Listed:
  • Veli Yilanci
  • Onder Ozgur

Abstract

Purpose: This paper aims to examine the real interest rate parity (RIP) theory for EU5 countries (France, Germany, Italy, Spain and the UK) versus the USA. Design/methodology/approach: Utilizing RALS-FADF and RALS-FKSS unit root tests, this study addresses non-normality, non-linearity and structural breaks in real interest rate differentials. Findings: The results confirm the RIP theory, indicating mean reversion of real interest rate differentials and highlighting impact of financial integration on monetary policy independence and arbitrage opportunities. The study notes that central banks' ability to influence domestic economies through interest rates is limited due to global financial interconnectedness. Originality/value: The paper offers a new test and bases its empirical setup on whether interest rate differentials are non-normally distributed. The test also considers real interest rate non-linearity and the non-normality in the analysis.

Suggested Citation

  • Veli Yilanci & Onder Ozgur, 2025. "Testing Real Interest Rate Parity for EU5 Countries: 200 Years of Data, Non-normality, Non-linearity and Breaks," Politická ekonomie, Prague University of Economics and Business, vol. 2025(3), pages 528-565.
    • Handle: RePEc:prg:jnlpol:v:2025:y:2025:i:3:id:1448:p:528-565
    DOI: 10.18267/j.polek.1448
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    More about this item

    Keywords

    Real interest rate parity; unit root; Fourier approximation; structural breaks; European countries; RALS terms; non-linearity;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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