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Policy-Induced Mean Reversion in the Real Interest Rate?

Author

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  • Zisimos Koustas

    (Department of Economics, Brock University)

  • Jean-Francois Lamarche

    (Department of Economics, Brock University)

Abstract

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, Italy and Japan for which we estimate nonlinear models capturing the dynamics of the interest rate.

Suggested Citation

  • Zisimos Koustas & Jean-Francois Lamarche, 2006. "Policy-Induced Mean Reversion in the Real Interest Rate?," Working Papers 0601, Brock University, Department of Economics.
    • Handle: RePEc:brk:wpaper:0601
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    References listed on IDEAS

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    More about this item

    Keywords

    Fisher Effect; Unit Roots; Self-Exciting Threshold Autoregression;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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