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An analysis of the time series properties of the UK ex-post real interest rate: fractional integration, breaks or nonlinear

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  • David McMillan
  • Mark Wohar

Abstract

In this article we examine the persistent nature of the 3-month UK real interest rate for the period 1957:Q2 to 2008:Q2. We employ unit root and cointegration tests, confidence intervals for the sum of the Autoregressive (AR) coefficient, fractional integration tests, structural break tests and threshold modelling. Evidence from both unit root tests and AR modelling support the view that the real rate is nonstationary. Similarly, and in contrast to previous literature, the fractional integration test supports covariance nonstationarity, although there is evidence of mean reversion. Evidence from structural break tests support stationary behaviour, but only if we allow for three or more breaks, which may not be defendable on economic grounds. Finally, stationary behaviour is supported by a nonlinear exponential smooth transition model, which suggests that the real rate behaves in a random walk fashion when the rate is close to equilibrium but exhibits strong mean reversion when the disequilibrium becomes large.

Suggested Citation

  • David McMillan & Mark Wohar, 2010. "An analysis of the time series properties of the UK ex-post real interest rate: fractional integration, breaks or nonlinear," Applied Financial Economics, Taylor & Francis Journals, vol. 20(22), pages 1697-1707.
    • Handle: RePEc:taf:apfiec:v:20:y:2010:i:22:p:1697-1707
    DOI: 10.1080/09603107.2010.522520
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    Cited by:

    1. Giorgio Canarella & Luis A. Gil-Alana & Rangan Gupta & Stephen M. Miller, 2020. "The Behavior of Real Interest Rates: New Evidence from a ``Suprasecular" Perspective," Working Papers 202093, University of Pretoria, Department of Economics.
    2. Giorgio Canarella & Luis A. Gil‐Alana & Rangan Gupta & Stephen M. Miller, 2022. "The behaviour of real interest rates: New evidence from a 'suprasecular' perspective," International Finance, Wiley Blackwell, vol. 25(1), pages 46-64, April.

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