The real interest rate differential: International evidence based on non-linear unit root tests

Ahmad Zubaidi Baharumshah and V., K S Liew and Chan, Tze Haw (2009) The real interest rate differential: International evidence based on non-linear unit root tests. Bulletin of Economic Research, 61 (1). pp. 83-94. ISSN 0307-3378

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Abstract

This paper aims at testing international parity conditions by using non-linear 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 real interest rate parity (RIP) follows a non-linear process except for the Taiwan, Hong Kong and Philippines relationships with both the USA and Japan. Overall, the empirical results are in favour of RIP using the USA and Japan as the centre countries but only if non-linearities 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 non-linear mean reversion process. © 2009 The Authors. Journal compilation © 2009 Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research.

Item Type:	Article
Keyword:	Non-linearities, Real interest parity, Unit root tests
Subjects:	H Social Sciences > HC Economic history and conditions
Department:	SCHOOL > Labuan School of International Business and Finance
Depositing User:	ADMIN ADMIN
Date Deposited:	23 Mar 2011 10:37
Last Modified:	30 Jun 2021 23:27
URI:	https://eprints.ums.edu.my/id/eprint/1525

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