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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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  25. BAI, Jushan & PERRON, Pierre, 1998. "Computation and Analysis of Multiple Structural-Change Models," Cahiers de recherche 9807, Universite de Montreal, Departement de sciences economiques.
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