The Real Interest Rate Differential: International Evidence Based on Non-Linear Unit Root Tests

12 Pages Posted: 17 Jan 2009

See all articles by Ahmad Zubaidi Baharumshah

Ahmad Zubaidi Baharumshah

University Putra Malaysia - Faculty of Economics and Management

Venus Khim-Sen Liew

Universiti Malaysia Sarawak

Chan Tze Haw

affiliation not provided to SSRN

Abstract

This paper aims at testing international parity conditions by using non-linear unit root tests advocated by Kapetanios et al. (2003, KSS). Results from the KSS tests based on 17 countries (G7 and 10 Asian countries) overwhelmingly show that the adjustment of real interest rates towards real interest rate parity (RIP) follows a non-linear process except for the Taiwan, Hong Kong and Philippines relationships with both the USA and Japan. Overall, the empirical results are in favour of RIP using the USA and Japan as the centre countries but only if non-linearities are accounted for in the data-generating process. Our findings confirm that interest rate differentials, like the real exchange rates reported in recent literature, display a non-linear mean reversion process.

Suggested Citation

Baharumshah, Ahmad Zubaidi and Liew, Venus Khim-Sen and Haw, Chan Tze, The Real Interest Rate Differential: International Evidence Based on Non-Linear Unit Root Tests. Bulletin of Economic Research, Vol. 61, Issue 1, pp. 83-94, January 2009, Available at SSRN: https://ssrn.com/abstract=1327357 or http://dx.doi.org/10.1111/j.1467-8586.2008.00288.x

Ahmad Zubaidi Baharumshah (Contact Author)

University Putra Malaysia - Faculty of Economics and Management ( email )

Serdang, Selangor 43400
Malaysia

Venus Khim-Sen Liew

Universiti Malaysia Sarawak ( email )

Faculty of Economics and Business
Kota Samarahan, Sarawak 94300
Malaysia
+6082582415 (Phone)
+6082671794 (Fax)

HOME PAGE: http://www.feb.unimas.my/

Chan Tze Haw

affiliation not provided to SSRN

No Address Available

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