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Keywords:

  • non-linearities;
  • panel data;
  • real interest rate parity;
  • structural change;
  • unit root test
  • C3;
  • E4;
  • F3;
  • G1

ABSTRACT

Previous studies applying traditional unit root tests generally have difficulty providing widespread evidence supporting the real interest rate parity hypothesis (RIPH). This paper aims to analyse the empirical fulfilment of RIPH for 17 OECD countries by employing many recently developed unit root tests. Power of the tests is raised by taking different approaches, such as using cross-sectional information, accounting for non-linear adjustment towards the equilibrium and allowing for structural changes. The combined results of the tests using panel information show that broad evidence in favour of RIPH prevails for 13 of the 17 countries. By contrast, univariate tests fail to make widespread rejections of the unit-root hypothesis. Our evidence reveals a high degree of market integration for developed countries, and the effect of monetary policies as a stabilization tool might be limited at least in the long run.