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

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File URL: ftp://coffee.econ.brocku.ca/RePec/pdf/0601.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 0601.

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Length: 24 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:brk:wpaper:0601
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  1. 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.
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  15. Koustas, Zisimos & Serletis, Apostolos, 1999. "On the Fisher effect," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 105-130, August.
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  18. Bec, Frederique & Guay, Alain & Guerre, Emmanuel, 2008. "Adaptive consistent unit-root tests based on autoregressive threshold model," Journal of Econometrics, Elsevier, vol. 142(1), pages 94-133, January.
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  22. Athanasios Orphanides & David W. Wilcox, 1996. "The opportunistic approach to disinflation," Finance and Economics Discussion Series 96-24, Board of Governors of the Federal Reserve System (U.S.).
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  24. Crowder, William J & Hoffman, Dennis L, 1996. "The Long-Run Relationship between Nominal Interest Rates and Inflation: The Fisher Equation Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 102-18, February.
  25. Pippenger, Michael K & Goering, Gregory E, 1993. "A Note on the Empirical Power of Unit Root Tests under Threshold Processes," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(4), pages 473-81, November.
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  30. 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.
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  32. Peter C.B. Phillips, 1998. "Econometric Analysis of Fisher's Equation," Cowles Foundation Discussion Papers 1180, Cowles Foundation for Research in Economics, Yale University.
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