Re-examining the real interest rate parity hypothesis under temporary gradual breaks and nonlinear convergence
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Date
2024
Journal Title
Journal ISSN
Volume Title
Publisher
Institute for Ionics
Access Rights
info:eu-repo/semantics/closedAccess
Abstract
This paper investigates the real interest parity hypothesis by testing stationarity of real interest rate differentials for 52 countries with respect to the USA. Taking account of the fact that both asymmetric adjustment and gradual temporary breaks may better characterize the dynamics of real interest rate differentials, we propose a new test that allows for two temporary shifts together with asymmetric adjustment towards the equilibrium. We employ the newly proposed test procedure along with the conventional ADF test as well as nonlinear KSS and OSH tests to examine stationarity of real interest rate differentials. Among the main results, we find that the newly proposed unit root test procedure highly outperforms the existing unit root tests in terms of rejecting the null hypothesis of unit root. Our results suggest that real interest rate differentials can be characterized by a stationary process with asymmetric adjustment around gradual and temporary shifts of mean.
Description
Keywords
ESTAR Nonlinearity, ESTR Trend, Multiple Smooth Breaks, RIRP
Journal or Series
Portuguese Economic Journal
WoS Q Value
Q1
Scopus Q Value
Q1
