SMOOTH BREAKS AND NONLINEAR MEAN REVERSION IN REAL INTEREST PARITY: EVIDENCE FROM EAST ASIAN COUNTRIES
Abdullah Gulcu () and
Dilem Yıldirim ()
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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
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
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Persistent link: https://EconPapers.repec.org/RePEc:met:wpaper:1804
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