Non-linearities in Real Interest Rate Parity: Evidence from OECD and Asian Developing Economies

• Main Authors: Ahmad Zubaidi, Baharumshah, Liew, Venus Khim-Sen, Mittelhammer, Ron
• Format: E-Article
• Language: English
• Published: Taylor & Francis 2010
• Subjects: H Social Sciences (General)
• Online Access: http://ir.unimas.my/id/eprint/18005/1/1226508X.2010.533842; http://ir.unimas.my/id/eprint/18005/; http://dx.doi.org/10.1080/1226508X.2010.533842

This paper investigates the validity real interest rate parity (RIP) for a sample of 19 OECD and Asian developing economies. The distinction of this paper is that we exploit both linearity and non-linear unit root tests as advocated by Dufrénot et al. (Applied Economics, 38, pp. 203–229, 2006) to validate the parity. The major finding are: (i) the alignments from real interest rate differentials (RIDs) are corrected in a non-linear fashion and that the adjustments is asymmetric in both size and speed; (ii) that RIP holds for the developed and developing countries; and (iii) the empirical results are invariant with respect to the US, Japan or Germany as the centre country.