Does the real interest parity hypothesis hold? Evidence for developed and emerging markets

Ferreira, Aline Alves; León‐Ledesma, Miguel A.

doi:10.1016/j.jimonfin.2006.11.003

Cited by 94 publications

(83 citation statements)

References 42 publications

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“…Ferreira and Leon-Ledesma, 2007) so to preserve space we do not present its derivation here. We restrict ourselves in saying that this is based on the stochastic model given by equation (1) below:…”

Section: Empirical Methodologymentioning

confidence: 99%

“…Also, to minimize the influence of factors such as foreign-exchange risk, whose role is more prominent in interest rates of longer-maturity (see e.g. Ferreira and Leon-Ledesma, 2007). , we define nominal interest rates as the three-month money market rate.…”

Section: Datamentioning

confidence: 99%

“…10 As we consider investments of three-month maturity, we transform the quoted annualised three-month nominal interest rates into a threemonth continuously compounded nominal rate of return. Then, following Ferreira and Leon-Ledesma (2007), for every period t we calculate ex-post real interest rates (r t ) as the difference between the three-month continuously compounded nominal rate of return observed in period t-3 (i t-3,t ) minus the percentage change of the HCPI recorded between period t-3 and t (π t-3,t ) Our analysis, therefore, is based on real rates of return on investments lasting for three months, calculated by r t = (i t-3,t ) -(π t-3,t ). These rates are then used to construct the RIRD series against the EMU average denoted by (r -r*) t .…”

Section: Datamentioning

confidence: 99%

“…Wu and Chen (1998), Gagnon and Unferth (1995) and Ong et al (1999) increase power through panel data tests, providing evidence in favour of RIP. 4 More recently, a number of studies, including Obstfeld and Taylor (2002), Nakagawa (2002), Mancuso et al (2003), Holmes and Maghrebi (2006) and Ferreira and Leon-Ledesma (2007), estimate non-linear models upholding RIRD mean-reversion, though not always around a zero value. 5 Overall, the recent literature has achieved significant progress towards overturning the early unit root RIRD findings.…”

Section: Introductionmentioning

confidence: 99%

“…This eliminates biases due to invalid approximations of inflation expectations (see e.g. Ferreira and Leon-Ledesma, 2007) and/or non-identical definitions of real returns (see e.g. Dutton, 1993).…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

Do real interest rates converge? Evidence from the European union

Arghyrou

Gregoriou

Kontonikas

2009

Journal of International Financial Markets, Institutions and Mo

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Andros GregoriouBrunel Business School Alexandros Kontonikas University of Glasgow, Department of Economics AbstractWe test for real interest parity (RIP) in the EU25 area. Our contribution is two-fold: First, we account for the previously overlooked effects of structural breaks on real interest rate differentials. Second, we test for RIP against the EMU average. For the majority of our sample countries we obtain evidence of real interest rate convergence towards the latter. Convergence, however, is a gradual process subject to structural breaks, typically falling close to the launch of the euro. Our findings have important implications relating to the single monetary policy and the progress new EU members have achieved towards joining the euro.

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Section: Empirical Methodologymentioning

confidence: 99%

Section: Datamentioning

confidence: 99%

Section: Datamentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Do real interest rates converge? Evidence from the European union

Arghyrou

Gregoriou

Kontonikas

2009

Journal of International Financial Markets, Institutions and Mo

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On real interest rate convergence among G7 countries

Riedel

2019

Empir Econ

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Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence.

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Globalization, long memory, and real interest rate convergence: a historical perspective

et al. 2022

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This paper investigates whether the real interest rate parity (RIRP) is valid during the three waves of globalizations that occurred in the last 150 years (1870-1914, 1944-1971, 1989 to the present). If any, these periods should favor RIRP, since globalization is a process where economies and financial markets become increasingly integrated into a global economic system. In contrast to the existing literature, we model the departures from RIRP as a long-term memory process and apply fractional integration methods on a sample of real interest rate differentials of seven developed countries: France, Germany, Holland, Italy, Japan, Spain, and the UK across the three globalization waves paired against the USA. We compute impulse response functions (IRF) to gain further insight into the memory characteristics of the RIRP differential processes and provide half-life estimates. We find that deviations from RIRP are mean reverting, providing robust evidence of real interest rate convergence during the three globalization waves. We shed further light on financial and commodity market integration during the three globalization waves by assessing the memory properties of uncovered interest rate parity (UIP) and relative purchasing power parity (PPP) differential processes. We find that deviations from relative PPP and UIP are not always mean-reverting processes. RIRP, relative PPP, and UIP hold simultaneously only in 7 out of 21 cases; RIRP and UIP hold in 11 out of 21 cases; RIRP hold without the support of relative PPP and UIP in 3 out of 21 cases. Thus, the evidence in favor of real interest rate convergence appears to be driven more by UIP than relative PPP. All these results are, to the authors knowledge, new to the literature.

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Does the real interest parity hypothesis hold? Evidence for developed and emerging markets

Cited by 94 publications

References 42 publications

Do real interest rates converge? Evidence from the European union

Do real interest rates converge? Evidence from the European union

On real interest rate convergence among G7 countries

Globalization, long memory, and real interest rate convergence: a historical perspective

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