Is the real interest rate parity condition affected by the method of calculating real interest rates?
Although the real interest rate parity (RIRP) hypothesis has been extensively tested, there are no conclusive findings. We argue that the mixed findings are a result of the different methods used to calculate the real interest rate. In this article, we examine whether the RIRP holds for four OECD countries using five different methods for computing the real interest rate. The results indicate that the connection between real interest rates tends to be sensitive to the computational method of the real interest rate. Thus, authors have to be careful when comparing results across existing studies, since the type of computational method might be responsible for differences in conclusions of the validity of the RIRP.
Volume (Year): 42 (2010)
Issue (Month): 14 ()
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