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On Mean Reversion in Real Interest Rates: An Application of Threshold Cointegtation

Adusei Jumah () and Robert Kunst ()

No 109, Economics Series from Institute for Advanced Studies

Abstract: Using data from Germany, Japan, UK, and the U.S., we explore possible threshold cointegration in nominal short- and long-run interest rates with corresponding inflation rates. Traditional cointegration implies perfect mean reversion in real rates and hence confirms the Fisher hypothesis. Threshold cointegration accounts for the possibility that this mean reversion is active only conditional on certain threshold values in the observed variables. We investigate whether findings of such effects can be exploited for interest rate prediction.

Keywords: Nonlinear time series; Fisher equation; Yield spread; Forecasting (search for similar items in EconPapers)
JEL-codes: C32 C53 E43 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2002-01
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