Domestic–foreign Interest Rate Differentials: Near Unit Roots and Symmetric Threshold Models
This paper investigates the near unit root behavior of interest rate differentials across countries using a symmetric Band–TAR model that allows for a heteroscedastic error process. We find that the time series properties of monthly short-term interest differentials over the period 1974–2005 between the United States and Canada, France, Germany, Japan, and the United Kingdom can be characterized by a symmetric Band–TAR process, which can explain its (near) unit root behavior reported in the extant literature. Results significantly reject a linear model in favor of the alternative hypothesis of a two-regime symmetric threshold model that exhibits significantly greater persistence within the threshold bands than when outside the threshold bands.
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Volume (Year): 73 (2007)
Issue (Month): 3 (January)
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