Real interest rate parity in the Pacific Rim countries: new empirical evidence

Zixiong Xie (), Shyh-Wei Chen () and An-Chi Wu ()
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Zixiong Xie: Jinan University
Shyh-Wei Chen: Tunghai University
An-Chi Wu: Tamkang University

Empirical Economics, 2023, vol. 64, issue 3, No 15, 1515 pages

Abstract: Abstract This paper revisits the real interest rate parity (RIP) hypothesis for the Pacific Rim countries under considerations of structural breaks in the auxiliary regression. To this end, we make use of a set of state-of-the-art unit root tests. We find strong evidence in favor of the RIP hypothesis by using the unit root tests considering smooth structural breaks. The empirical results are almost unchanged using the unit root test incorporating abrupt structural breaks. The smooth-break models have better goodness of fit than the abrupt-break models in characterizing the long-run trend of real interest rate differentials of the countries examined. The results of the simulation experiments show that the smooth-break unit root test can capture the feature of the abrupt unit root test, but not vice versa. Empirical evidence reveals a high degree of market integration for the Pacific Rim countries over time allowing for structural breaks.

Keywords: Real interest rate parity; Real interest rate differential; Structural break; Unit root (search for similar items in EconPapers)
JEL-codes: C22 F36 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s00181-022-02282-w

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