Has the Financial Crisis affected the Real Interest Rate Dynamics in Europe?

Nektarios Aslanidis () and Selva Demiralp
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Nektarios Aslanidis: Universitat Rovira I Virgili

Journal of Business Cycle Research, 2020, vol. 16, issue 1, No 1, 18 pages

Abstract: Abstract We investigate the effects of the financial crisis on the stationarity of real interest rates for a group of Euro area countries. We use a new unit root test developed by Pesaran et al. (J Econom 115(1): 53–74, 2013) that allows for multiple unobserved factors in a panel set up. In this multifactor framework, we make use of a number of additional variables such as the stock price volatility and monetary policy expectations that are assumed to share common factors with the real interest rate. Based on recursive (Pesaran et al. 2013) test statistics, our results suggest that while short-term and long-term real interest rates were stationary before the financial crisis, they became non-stationary during the crisis period. Robustness analysis shows that the results are not sensitive to the use of ex-post real interest rates versus ex-ante real interest rates.

Keywords: Real interest rates; Euro area; Financial crisis; Recursive panel unit root tests; Cross-sectional dependence (search for similar items in EconPapers)
JEL-codes: C23 E43 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s41549-020-00041-3

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