EconPapers    
Economics at your fingertips  
 

SMOOTH BREAKS AND NONLINEAR MEAN REVERSION IN REAL INTEREST PARITY: EVIDENCE FROM EAST ASIAN COUNTRIES

Abdullah Gulcu () and Dilem Yıldirim ()
Additional contact information
Dilem Yıldirim: Department of Economics, Middle East Technical University, Ankara, Turkey

No 1804, ERC Working Papers from ERC - Economic Research Center, Middle East Technical University

Abstract: This study aims to explore the empirical validity of the real interest rate parity (RIP) hypothesis for East Asian countries using Japan as the base country. To this end, we employ the recently proposed unit root tests of Christopoulos and Leon-Ledesma (2010) that account for both multiple smooth structural breaks of unknown form and nonlinear mean reversion in the series. Our empirical results uncover overwhelming evidences in favor of the RIP hypothesis for the whole countries in our sample. More specifically, through a Fourier approximation, it is observed that all real interest rate differentials display a mean reverting behavior around an infrequently smooth-breaking mean, with the breaks being in accordance with the financial reforms and economic crises witnessed by the countries. Moreover, the degree of mean reversion appears to vary nonlinearly with the size of real interest rate appreciations and depreciations.

Keywords: Real Interest Rate Parity; Financial Integration; Nonlinearity; Smooth Structural Breaks; East Asian Countries (search for similar items in EconPapers)
JEL-codes: C22 E40 F36 F40 G01 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-sea
Date: 2018-02, Revised 2018-02
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://www.erc.metu.edu.tr/menu/series18/1804.pdf First version, 2018 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:met:wpaper:1804

Access Statistics for this paper

More papers in ERC Working Papers from ERC - Economic Research Center, Middle East Technical University Contact information at EDIRC.
Bibliographic data for series maintained by Erol Taymaz ().

 
Page updated 2018-06-22
Handle: RePEc:met:wpaper:1804