Nonlinearity in the real interest parity hypothesis

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2013
Kadakal, Zeynep Şeyma
This study examines Real Interest Parity (RIP) hypothesis for some old and present members of European Free Trade Area (EFTA). The analysis entails the application of nonlinear unit root tests proposed by Kapetanios, Shin and Snell (2003) and Kılıç (2011) for January 1967 and August 2012 period, which coincides with some stages of Balassa’s (1961) economic integration classification. The results show that nonlinearity in real interest rate differentials is significant for most cases and more supportive evidence for RIP can be obtained when nonlinearity is taken into consideration. Moreover, countries with stronger economic ties are more prone to verify RIP.