Mean Reversion of Short‐run Interest Rates in Emerging Countries*

Bertrand Candelon and Luis A. Gil‐Alana
Authors registered in the RePEc Author Service: Luis Alberiko Gil-Alana

Review of International Economics, 2006, vol. 14, issue 1, 119-135

Abstract: In this paper we examine the stochastic behavior of short‐run interest rates in several emerging countries using fractional integration techniques. We allow for a much richer flexibility in the dynamic behavior of the series than the classical representations based on I(0) or I(1) processes. It appears that for Singapore and Thailand nominal interest rates are mean‐reverting, whereas for Mexico, Malaysia, the Philippines, and Korea, the presence of a unit‐root test depends on the assumptions regarding the residuals’ autocorrelation. The results also suggest that uncovered interest parity (UIP) can only hold for two emerging countries. For the other countries, the stabilization policies in the aftermath of the currency crises have led to the rejection of the UIP hypothesis.

Date: 2006
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