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Policy-Induced Mean Reversion in the Real Interest Rate?

  • Zisimos Koustas

    ()

    (Department of Economics, Brock University)

  • Jean-Francois Lamarche

    ()

    (Department of Economics, Brock University)

This paper 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, Germany, Italy, and the US. For these countries we estimate nonlinear models to capture the dynamics of the ex-post real interest rate.

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File URL: ftp://coffee.econ.brocku.ca/RePec/pdf/0503.pdf
File Function: First version, July 2005
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Paper provided by Brock University, Department of Economics in its series Working Papers with number 0503.

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Length: 21 pages
Date of creation: Jul 2005
Date of revision: Jul 2005
Handle: RePEc:brk:wpaper:0503
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  1. René Garcia & Pierre Perron, 1995. "An Analysis of the Real Interest Rate Under Regime Shifts," CIRANO Working Papers 95s-05, CIRANO.
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  15. Weber, Axel A, 1994. "Testing Long-run Neutrality: Empirical Evidence for G7 Countries with Special Emphasis on Germany," CEPR Discussion Papers 1042, C.E.P.R. Discussion Papers.
  16. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
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  19. Koustas, Zisimos, 1998. "Canadian Evidence on Long-Run Neutrality Propositions," Journal of Macroeconomics, Elsevier, vol. 20(2), pages 397-411, April.
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  23. Fisher, Mark E & Seater, John J, 1993. "Long-Run Neutrality and Superneutrality in an ARIMA Framework," American Economic Review, American Economic Association, vol. 83(3), pages 402-15, June.
  24. Weber, Axel, 1994. "Testing Long-run Neutrality: Empirical Evidence for G7-Countries with Special Emphasis on Germany," Discussion Paper Serie B 281, University of Bonn, Germany, revised Jun 1994.
  25. James Bullard, 1999. "Testing long-run monetary neutrality propositions: lessons from the recent research," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 57-77.
  26. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August.
  27. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
  28. Drazen, Allan, 1981. "Inflation and capital accumulation under a finite horizon," Journal of Monetary Economics, Elsevier, vol. 8(2), pages 247-260.
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