Baharumshah, Ahmad Zubaidi and Liew, Venus Khim-Sen and Chan, Tze-Haw (2007): The real interest rate differential: international evidence based on nonlinear unit root tests.
Download (176kB) | Preview
This paper aims at testing international parity conditions by using nonlinear unit root tests advocated by Kapetanios et al. (2003, KSS). Results from the KSS tests based on 17 countries (G7 and 10 Asian countries) overwhelmingly show that the adjustment of real interest rates towards the RIP follows a nonlinear process except for the Malaysian relationships with both the US and Japan. Overall, the empirical results are in favor of RIP using the US and Japan as the center countries but only if nonlinearities are accounted for in the data generating process. Our findings confirm that interest rate differentials, like the real exchange rates reported in recent literature, display a nonlinear mean reversion process.
|Item Type:||MPRA Paper|
|Original Title:||The real interest rate differential: international evidence based on nonlinear unit root tests|
|Keywords:||real interest parity; nonlinearities; unit root tests|
|Subjects:||F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements
F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration
|Depositing User:||Venus Khim-Sen Liew|
|Date Deposited:||22. Feb 2008 06:48|
|Last Modified:||24. Mar 2015 03:56|
Bahmani-Oskooee, M., Kutan, A.M. and Zhou, S. (2007). ‘Testing PPP in the non-linear STAR framework’, Economics Letters, 94, pp. 104-110.
Balke, N. and Wohar, M. (1998). ‘Nonlinear dynamics and covered interest parity’, Empirical Economics, 23, pp. 535-559.
Cavaglia, S. (1992). ‘The persistence of real interest differentials: a Kalman filtering approach’, Journal of Monetary Economics, 29, pp. 429–443.
Chinn, M. D. and Frankel, J. A. (1995). ‘Who drives real interest rates around the Pacific Rim: the USA or Japan?’, Journal of International Money and Finance, 14 (6), pp. 801-821.
Chortareas, G. E., Kapetanios, G. and Shin, Y. (2002). ‘Nonlinear mean reversion in real exchange rates’, Economics Letters, 77, pp. 411-417.
Crowder, W.J. (1995). ‘Covered interest parity and international capital market efficiency’, International Review of Economics and Finance, 4, pp. 115-132.
Elliot, G., Rothenberg, T. and Stock, J. (1996). ‘Efficient tests for an autoregressive unit root, Econometrica, 64, pp. 813-836.
Enders, W. and Siklos, P.L. (2001). ‘Cointegartion and Threshold Adjustment’, Journal of Business and Economics Statistics, 19, pp. 166-176.
Enders, W and Chumrusphonlert, K. (2004). ‘Threshold cointegration and purchasing power parity in the pacific nations’, Applied Economics, 36, pp. 889-896.
Frenkel, J. (1976). ‘A monetary approach to exchange rate: doctrinal aspects of empirical evidence’, Scandinavian Journal of Economics, 78, pp. 200-204.
Hallwood, C. P. and MacDonald, R. (2000). International Money and Finance, Blackwell Publishers, Oxford.
Ho, C., Guonan, M. and McCauley, R (2005). ‘Trading Asian currencies’, Bank of International Settlements Quarterly Review (March)
Holmes, M. J. and Maghrebi, N. (2004). ‘Asian real interest rates, nonlinear dynamics, and international parity’, International Review of Economics and Finance, 13, pp. 387-405.
Holmes, M. J. (2002). ‘Does long-run real interest parity HOLD among EU countries? Some new panel data evidences’, Quarterly Review of Economics and Finance, 42, pp. 733-746.
Holmes, M. J., and Maghebi, N. (2006). ‘Are international real interest rate linkage characterized by asymmetric adjustment?’ Journal of International Financial Markets, Institutions and Money, 16, pp. 384-396.
Kapetanios, G., Shin, Y. and Snell, A. (2003). ‘Testing for a unit root in the nonlinear STAR framework,’ Journal of Econometrics, 112, pp. 359-379. MacDonald, R. and Taylor, M.P. (1989). ‘Interest rate parity: some new evidence’, Bulletin of Economic Research, vol. 41, 255-74.
McMillan, D. G. (2004). ‘Non-linear error corrections: evidence for UK interest rates’, The Manchester School, 72(5), pp. 626-640.
Mussa M. (1976). ‘The exchange rate, balance of payment, and monetary and fiscal policy under a regime of controlled floating’, Scandinavian Journal of Economics, 78, pp. 229-248.
Ng, S., and Perron, P. (1995). ‘Unit root tests in ARMA models with data-dependent methods for the selection of truncated lag’, Journal of American Statistical Association, 90 (429), pp. 268-281.
Ng. S., and Perron, P. (2001). ‘Lag length selection and theconstruction of unit root test with good size and power’, Econometrica, 69, pp. 1519-1554.
Obstfeld, M. (2001). ‘International macroeconomics: beyond the Mundell-Fleming model,’ NBER Working Papers 8369, July, 2001.
Obstfeld, M. and Taylor, A.M. (2002). ‘Globalization and capital markets’ NBER Working Papers 8846, March, 2002.
Pakko, M.R. (2000). ‘Do high interest rates stem capital outflows?’ Economics Letters, 67, 187-192.
Sarantis, N. (1999). ‘Modelling nonlinearities in effective exchange rates,’ Journal on International Money and Finance, 18, pp. 27-45.
Sarno, L. (2001). ‘The behavior of US public debt: a nonlinear perspective,’ Economics Letters, 74(1), pp. 119-125. Strauss, J. and Wohar, M.E. (2007). ‘Domestic-foreign interest rate differentials: near unit roots and symmetric threshold models’, Southern Economic Journal, 73(3), pp. 814-829. Taylor, M .P. and Sarno, L. (1998). ‘The behavior of real exchange rate during the post-Bretton Woods period’, Journal of International Economic, 46, pp. 281-312.
Taylor, A. M. (2001). ‘Potential pitfalls for the purchasing-power-parity puzzle? Sampling and specification biases in mean-reversion tests of the law of one price’, Econometrica, 69, pp. 473–498.
Taylor, M. P., Peel, D. and Sarno, L. (2001). ‘Nonlinear mean-reversion in real exchange rates: toward a solution to the purchasing power parity puzzles’, International Economic Review, 42, pp. 1015-1042.
Wu, J.-L. and Chen. (1998). ‘A re-examination of real interest rate parity’, Canadian Journal of Economics, 31(4), pp. 837-851.
Wu, J.-L. and Fountas, S. (2000). ‘Real interest rate parity under regime shifts and implication for monetary policy’, The Manchester School, 68(2), pp. 685-700.