An Encompassing Test of Real Interest Rate Equalization*

Aaron Smallwood and Stefan Norrbin

Review of International Economics, 2008, vol. 16, issue 1, 114-126

Abstract: Much confusion about the real interest rate connection amongst different countries may result from a narrow approach to analyzing the data. Using an encompassing methodology that accommodates many different types of times‐series processes, we find that real interest rates are mean‐reverting long‐memory variables. We show that cointegration methodology can often fail in this environment. Using a more general approach, we detect a limited connection between real interest rates across countries. In particular, Germany is connected with several European countries, but the US is connected only with Canada and possibly the United Kingdom.

Date: 2008
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https://doi.org/10.1111/j.1467-9396.2007.00731.x

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