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South Africa¡¯s Short and Long Term Interest Rates: A Threshold Cointegration Analysis

Smile Dube () and Yan Zhou ()

Business and Economic Research, 2013, vol. 3, issue 1, 187-211

Abstract: This paper presents a two-regime vector error-correction model (VECM) with a single cointegrating vector and a threshold effect in the error-correction term. We use a Hansen-Seo (2002) algorithm to extract maximum likelihood estimates in eight threshold cointegration model s that relate short-term to long-term interest rates in South Africa for the period 1990M1-2010M7. We employ a SupLM test to test for the presence of threshold. The Hansen-Seo algorithm yields both linear and non-linear estimates plus critical values used to test threshold effects. The method is applied by relating the South Africa Reserve Bank policy rate, the repo (short-term) to intermediate (TB rate, money market rate) and long-term rates (the 10-year government bond, the loan and deposit rates). In all cases, linear cointegration is rejected in favor of a threshold effect.

Keywords: Market interest rates; Threshold cointegration; SARB; Repo (repurchase rate) (search for similar items in EconPapers)
JEL-codes: C32 (search for similar items in EconPapers)
Date: 2013
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