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Smooth breaks and nonlinear mean reversion in real interest parity: Evidence from East Asian countries
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Date
2019-08-18
Author
Gülcü, Abdullah
Yıldırım Kasap, Dilem
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This study aims to explore the empirical validity of the real interest rate parity (RIP) hypothesis for East Asian countries using Japan as the base country. To this end, we employ the recently proposed unit root tests of Christopoulos and Leon-Ledesma that account for both multiple smooth structural breaks of unknown form and nonlinear mean reversion in the series. Our empirical results uncover overwhelming evidences in favor of the RIP hypothesis for the whole countries in our sample. More specifically, through a Fourier approximation, it is observed that all real interest rate differentials display a mean-reverting behavior around an infrequently smooth-breaking mean, with the breaks being in accordance with the financial reforms and economic crises witnessed by the countries. Moreover, the degree of mean reversion appears to vary nonlinearly with the size of real interest rate appreciations and depreciations.
Subject Keywords
Geography, Planning and Development
,
Development
,
Aerospace Engineering
URI
https://hdl.handle.net/11511/42534
Journal
JOURNAL OF INTERNATIONAL TRADE & ECONOMIC DEVELOPMENT
DOI
https://doi.org/10.1080/09638199.2019.1582083
Collections
Department of Economics, Article
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This study aims to explore the empirical validity of the real interest rate parity (RIP) hypothesis for East Asian countries using Japan as the base country. To this end, we employ the recently proposed unit root tests of Christopoulos and Leon-Ledesma (2010) that account for both multiple smooth structural breaks of unknown form and nonlinear mean reversion in the series. Our empirical results uncover overwhelming evidences in favor of the RIP hypothesis for the whole countries in our sample. More spe...
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A. Gülcü and D. Yıldırım Kasap, “Smooth breaks and nonlinear mean reversion in real interest parity: Evidence from East Asian countries,”
JOURNAL OF INTERNATIONAL TRADE & ECONOMIC DEVELOPMENT
, pp. 668–685, 2019, Accessed: 00, 2020. [Online]. Available: https://hdl.handle.net/11511/42534.