FURTHER EVIDENCE ON REAL INTEREST RATE EQUALIZATION: PANEL INFORMATION, NON-LINEARITIES AND STRUCTURAL CHANGES

Authors


Ching-Chuan Tsong, Department of Economics, National Chi Nan University, Nantou 545, Taiwan. Tel: 88649-291-0960; Fax: 88649-291-4435; Email: tcc126@ncnu.edu.tw. The authors thank the Editor, Professor Klaus Zauner, and the anonymous referees for their insightful comments and suggestions on an earlier version of this paper. All errors are ours. This paper is parts of the research project financially sponsored by the National Science Council of Taiwan (NSC-99-2410-H-151-006-).

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.

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