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Evidence of nonlinear mean reversion in the real interest rate

  • Zisimos Koustas
  • Jean-Francois Lamarche

This article utilizes tests for a unit root that have power against nonlinear alternatives to provide empirical evidence on the time series properties of the ex-post real interest rate in the G7 countries. We find that the unit root hypothesis can be rejected in the presence of a nonlinear alternative motivated by theoretical literature on optimal monetary policy rules. This represents a reversal of the results obtained using standard linear unit-root and cointegration tests. Tests for linearity reject this hypothesis for Canada, France, Italy and Japan for which we estimate nonlinear models capturing the dynamics of the interest rate. For these countries, ex-post real interest rates follow a nonlinear model characterized by mean reversion and provide statistical evidence for the Fisher effect.

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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 42 (2010)
Issue (Month): 2 ()
Pages: 237-248

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Handle: RePEc:taf:applec:v:42:y:2010:i:2:p:237-248
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