Real interest parity: A note on Asian countries using panel stationarity tests

Abstract

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 AbstractExisting panel data studies of real interest parity are either unable to identify which panel members are characterised by stationary real interest differentials, or are subject to size distortion resulting from the presence of structural breaks and cross-sectional dependencies. Using a panel stationarity testing procedure recently advocated by Hadri and Rao (2008) that allows for structural breaks and cross-sectional dependency, we are unable to reject the stationarity of Asian real interest rate differentials. JEL Classification: C33; F36; G15 Keywords: Heterogeneous dynamic panels, real interest parity, mean reversion, panel stationarity test.♣ We would like to thank an anonymous referee for useful comments and suggestions on an earlier version of the paper. The usual disclaimer applies. ♦ Corresponding author.2

A RE‐EXAMINATION OF REAL INTEREST PARITY IN CEECs USING ‘OLD’ AND ‘NEW’ SECOND‐GENERATION PANEL UNIT ROOT TESTS

“…As the integration of capital markets affecting the 'peripheral' regions of the world started in the 1990s, the empirical analysis of the RIP validity was extended to cover these regions. In this line, Baharumshah et al (2005Baharumshah et al ( , 2011, Liew and Ling (2008) and Holmes et al (2011) found evidence of RIP for Asian countries. Camarero et al (2010) and Ferreira and León-Ledesma (2007) showed the presence of the RIP in a sample of industrial and emerging economies.…”

Emerging Markets and Financial Resilience

“…in the series is simply ignored (Perron, 1989). The issue was tackled in a recent assessment of both theorems using various methods (Narayan, 2006;Holmes et al, 2011;Chan et al, 2011). For instance, if real exchange rates are subjected to structural breaks, then large and permanent devaluations of the currencies during a currency crisis will bias the test toward acceptance of the unit root hypothesis.…”

“…Recent studies have also progressed into panel tests of unit root and cointegration to uncover more evidence for PPP (e.g., Wu, 1996;Papell, 1997;O'Connell, 1998; and RIP (e.g., Holmes, 2002;Holmes et al, 2011;Baharumshah et al, 2011). The advantages of panel tests rely on the exploitation of cross-border variations of the data and the increased sample size, which yield higher test power in the estimation.…”

Smooth breaks and nonlinear mean reversion in real interest parity: Evidence from East Asian countries

“…In fact, the choice of maturity of nominal interest rates is somewhat controversial in the empirical RIP literature. While some researchers including Baharumshah et al (2005), Ferreira and Ledesma (2007), Holmes et al (2011) and Liu et al (2013) have used the shortrun nominal interest rates, the studies by Fountas and Wu (1999), Obstfeld and Taylor (2002) and Rapach and Weber (2004), amongst others, have employed long-term nominal interest rates. However, as indicated by Ferreira and Ledesma (2007) and Chang and Su (2015), investors usually prefer short-term investments to investments with long-term maturities due to the former being exposed to less interest rate risk.…”