A New Test of the Real Interest Rate Parity Hypothesis: Bounds Approach and Structural Breaks

George Bagdatoglou and Alexandros Kontonikas ()

Working Papers from Business School - Economics, University of Glasgow

Abstract: We test the real interest rate parity hypothesis using data for the G7 countries over the period 1970-2008. Our contribution is two-fold. First, we utilize the ARDL bounds approach of Pesaran et al. (2001) which allows us to overcome uncertainty about the order of integration of real interest rates. Second, we test for structural breaks in the underlying relationship using the multiple structural breaks test of Bai and Perron (1998, 2003). Our results indicate significant parameter instability and suggest that, despite the advances in economic and financial integration, real interest rate parity has not fully recovered from a breakdown in the 1980s.

Keywords: real interest rates parity; bounds test; structural breaks (search for similar items in EconPapers)
JEL-codes: C15 C22 F21 F32 (search for similar items in EconPapers)
Date: 2009-05
New Economics Papers: this item is included in nep-cba and nep-ifn
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Related works:
Journal Article: A New Test of the Real Interest Rate Parity Hypothesis: Bounds Approach and Structural Breaks (2011)
Working Paper: A New Test of the Real Interest Rate Parity Hypothesis: Bounds Approach and Structural Breaks (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2009_17

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