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Re-examining the real interest rate parity hypothesis under temporary gradual breaks and nonlinear convergence

Author

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  • Mübariz Hasanov

    (Piri Reis University)

  • Tolga Omay

    (Atilim University)

  • Vasif Abioglu

    (Aksaray University)

Abstract

This paper investigates the real interest parity hypothesis by testing stationarity of real interest rate differentials for 52 countries with respect to the USA. Taking account of the fact that both asymmetric adjustment and gradual temporary breaks may better characterize the dynamics of real interest rate differentials, we propose a new test that allows for two temporary shifts together with asymmetric adjustment towards the equilibrium. We employ the newly proposed test procedure along with the conventional ADF test as well as nonlinear KSS and OSH tests to examine stationarity of real interest rate differentials. Among the main results, we find that the newly proposed unit root test procedure highly outperforms the existing unit root tests in terms of rejecting the null hypothesis of unit root. Our results suggest that real interest rate differentials can be characterized by a stationary process with asymmetric adjustment around gradual and temporary shifts of mean.

Suggested Citation

  • Mübariz Hasanov & Tolga Omay & Vasif Abioglu, 2024. "Re-examining the real interest rate parity hypothesis under temporary gradual breaks and nonlinear convergence," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 23(3), pages 355-382, September.
    • Handle: RePEc:spr:portec:v:23:y:2024:i:3:d:10.1007_s10258-023-00245-2
    DOI: 10.1007/s10258-023-00245-2
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    More about this item

    Keywords

    RIRP; Multiple smooth breaks; ESTR trend; ESTAR nonlinearity;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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