Real interest rate parity in East Asian countries based on China with flexible Fourier stationary test

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

Japan and the World Economy, 2013, vol. 25-26, 52-58

Abstract: This study applies stationary test with a flexible 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 relative to China for ten East Asian 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-liner process. We examine the validity of RIRP from the non-linear point of view and provide robust evidence clearly indicate that RIRP holds true for ten East Asian countries. It implies that the choices and effectiveness of the monetary and fiscal policies in the East Asian economies will be highly influenced external factors originating from China. Also, our findings point out their real interest rate convergence relative to China is mean reversion towards RIRP equilibrium values in a non-linear way.

Keywords: Fourier stationary test; Structural change; Trend breaks; Real interest Rate parity; China base (search for similar items in EconPapers)
JEL-codes: C22 F36 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:japwor:v:25-26:y:2013:i::p:52-58

DOI: 10.1016/j.japwor.2013.01.003

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