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On Mean Reversion in Real Interest Rates: An Application of Threshold Cointegtation

Author

Listed:
  • Jumah, Adusei

    (Department of Economics at BWZ and European Central Bank)

  • Kunst, Robert M.

    (Department of Economics and Finance, Institute for Advanced Studies and Department of Economics at BWZ)

Abstract

Using data from Germany, Japan, UK, and the U.S., we explore possible threshold cointegration in nominal short- and long-run interest rates with corresponding inflation rates. Traditional cointegration implies perfect mean reversion in real rates and hence confirms the Fisher hypothesis. Threshold cointegration accounts for the possibility that this mean reversion is active only conditional on certain threshold values in the observed variables. We investigate whether findings of such effects can be exploited for interest rate prediction.

Suggested Citation

  • Jumah, Adusei & Kunst, Robert M., 2002. "On Mean Reversion in Real Interest Rates: An Application of Threshold Cointegtation," Economics Series 109, Institute for Advanced Studies.
    • Handle: RePEc:ihs:ihsesp:109
    as

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    File URL: https://irihs.ihs.ac.at/id/eprint/1404
    File Function: First version, 2002
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    References listed on IDEAS

    as
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Interest Rates – 3
      by Clive Jones in Business Forecasting on 2014-03-26 03:44:29

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    Cited by:

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    3. Kunst, Robert M., 2002. "Decision Maps for Bivariate Time Series with Potential Thrshold Cointegration," Economics Series 121, Institute for Advanced Studies.

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    Keywords

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    JEL classification:

    • 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
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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