Real interest rate parity with Flexible Fourier stationary test for Central and Eastern European countries

Chi-Wei Su, Hsu-Ling Chang and Lin Liu

Economic Modelling, 2012, vol. 29, issue 6, 2719-2723

Abstract: This study applies stationary test with a Fourier function proposed by Enders and Lee (2012) to test the validity of long-run real interest rate parity (RIRP) to assess the non-stationary properties of the real interest rate convergence for twelve Central and Eastern European (CEE) countries. We find that our approximation has higher power to detect U-shaped breaks and smooth breaks than linear method if the true data generating process of interest rate convergence is in fact a stationary non-linear process. We examine the validity of RIRP from the non-linear point of view and provide robust evidence clearly indicating that RIRP holds true for nine CEE countries. Our findings point out that their interest rate adjustment is mean reversion towards RIRP equilibrium values in a non-linear way.

Keywords: Fourier stationary test; Structural change; Trend breaks; Real interest rate parity (search for similar items in EconPapers)
JEL-codes: C22 F36 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:6:p:2719-2723

DOI: 10.1016/j.econmod.2012.06.017

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