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Are Real Interest Rates Equal Across Countries? An Empirical Investigation of International Parity Conditions



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    • Graduate School of Business, Columbia University and NBER. I thank the following for their helpful comments: Robert Cumby, Thomas Doan, Robert Gordon, Fumio Hayashi, Craig Hakkio, Marjorie McElroy, Michael Mussa, Michael Parkin, and the participants in workshops at the University of Liverpool Seminar in Open Economy Macroeconomics, The Board of Governors of the Federal Reserve, the University of Illinois, Champaign-Urbana, Northwestern University, University of Western Ontario, Columbia University, Tulane University, and the University of Florida. This research is part of the National Bureau of Economic Research's Program in Economic Fluctuations. The National Science Foundation and the Sloan Foundation have provided research support. The usual disclaimer applies.


This paper conducts empirical tests of the equality of real interest rates across countries. The empirical evidence strongly rejects the hypothesis of real rate equality and the joint hypotheses of uncovered interest parity and ex ante relative PPP, or the unbiasedness of forward rate forecasts and ex ante relative PPP. The evidence suggests that it is worth studying open economy macroeconomic models which allow: 1) domestic real rates to differ from world rates, 2) time varying risk premiums in the forward market, or 3) deviations from ex ante relative PPP.

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