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Examining real interest parity: which component reverts quickest and in which regime?

Author

Listed:
  • Kavita Sirichand

    (School of Business and Economics, Loughborough University)

  • Andrew Vivian

    (School of Business and Economics, Loughborough University)

  • Mark E.Wohar

    (Department of Economics, University of Nebraska-Omaha, Omaha, Nebraska, USA.)

Abstract

This article re-examines real interest parity (RIP), focusing upon which component of real interest parity drives convergence to parity. We find that it is the reversion of inflation rather than nominal interest rates which is the primary source of convergence to RIP. Nominal interest rate differential are found to be persistent during both periods. Furthermore, we additionally find that mean reversion in the inflation differentials is faster during the Gold Standard period.

Suggested Citation

  • Kavita Sirichand & Andrew Vivian & Mark E.Wohar, 2014. "Examining real interest parity: which component reverts quickest and in which regime?," Discussion Paper Series 2014_05, Department of Economics, Loughborough University, revised Jul 2014.
    • Handle: RePEc:lbo:lbowps:2014_05
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    Cited by:

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    2. Jana Riedel, 2020. "On real interest rate convergence among G7 countries," Empirical Economics, Springer, vol. 59(2), pages 599-626, August.
    3. Abdullah Gulcu & Dilem Yildirim, 2018. "Smooth Breaks And Nonlinear Mean Reversion In Real Interest Parity: Evidence From East Asian Countries," ERC Working Papers 1804, ERC - Economic Research Center, Middle East Technical University, revised Feb 2018.
    4. Zixiong Xie & Shyh-Wei Chen & An-Chi Wu, 2023. "Real interest rate parity in the Pacific Rim countries: new empirical evidence," Empirical Economics, Springer, vol. 64(3), pages 1471-1515, March.
    5. Kim, Daehwan & Moneta, Fabio, 2021. "Long-term foreign exchange risk premia and inflation risk," International Review of Financial Analysis, Elsevier, vol. 78(C).

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    More about this item

    Keywords

    comovement; real interest rate parity; inflation differential; nominal interest;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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