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The real exchange rate-real interest rate relation: evidence from tests for symmetric and asymmetric threshold cointegration

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  • Robert Sollis

    (Department of Economics and Finance, University of Durham, UK)

  • Mark E. Wohar

    (Department of Economics, University of Nebraska at Omaha, USA)

Abstract

This paper investigates the existence of threshold cointegration between real exchange rates and real interest rate differentials. Unlike previous work, which generally fails to find evidence of a long-run relationship employing linear models, we employ tests of the null hypothesis of no cointegration derived from nonlinear bivariate models that allow for threshold cointegration under the alternative hypothesis. For six of the countries in our sample our analysis reveals some evidence of a nonlinear long-run relationship between real exchange rates and real interest rate differentials. Asymmetric mean reversion of the equilibrium error is found to be driven by the asymmetric short-run adjustment of the real exchange rate to dis-equilibrium. When threshold cointegration is found to exist, we find stronger mean reversion when the equilibrium error is negative relative to when it is positive. Copyright © 2006 John Wiley & Sons, Ltd.

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  • Robert Sollis & Mark E. Wohar, 2006. "The real exchange rate-real interest rate relation: evidence from tests for symmetric and asymmetric threshold cointegration," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(2), pages 139-153.
    • Handle: RePEc:ijf:ijfiec:v:11:y:2006:i:2:p:139-153
    DOI: 10.1002/ijfe.285
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    References listed on IDEAS

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    2. Li, Kui-Wai & Wong, Douglas K T, 2011. "The Exchange Rate and Interest Rate Differential Relationship: Evidence from Two Financial Crises," MPRA Paper 35297, University Library of Munich, Germany.
    3. Afsin Sahin, 2019. "Loom of Symmetric Pass-Through," Economies, MDPI, vol. 7(1), pages 1-25, February.
    4. Mendonca, Gui Pedro, 2008. "Structural Breaks, Regime Change and Asymmetric Adjustment: A Short and Long Run Global Approach to the Output/Unemployment Dynamics," MPRA Paper 14648, University Library of Munich, Germany.
    5. H. F. Tareq Ahmed & Nur Syazwani Mazlan, 2021. "The Impact of Interest Rate on Exchange Rate Within ASEAN Countries: Evidence from Linear and Nonlinear ARDL Frameworks," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 13(1), pages 7-34, January.
    6. Yu Hsing, 2010. "Analysis of movements in the AUD/USD exchange rate: comparison of four major models," Applied Economics Letters, Taylor & Francis Journals, vol. 17(6), pages 575-580.
    7. Andrew Phiri, 2018. "Asymmetric Pass-through Effects from Monetary Policy to Housing Prices in South Africa," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 16(2 (Summer), pages 123-140.
    8. Dinçer Afat & Michael Frömmel, 2020. "An Alternative Version of Purchasing Power Parity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 25(4), pages 511-517, October.
    9. Wan, Jer-Yuh & Kao, Chung-Wei, 2009. "Price discovery in Taiwan's foreign exchange market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(1), pages 77-93, February.

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