Re-examining the real interest rate parity hypothesis (RIPH) using panel unit root tests with asymmetry and cross-section dependence

Corakei A., Emirmahmutoglu F., Omay T.

EMPIRICA, vol.44, no.1, pp.91-120, 2017 (SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 44 Issue: 1
  • Publication Date: 2017
  • Doi Number: 10.1007/s10663-015-9312-4
  • Journal Name: EMPIRICA
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus
  • Page Numbers: pp.91-120
  • Keywords: Real interest rate parity, Asymmetric adjustment, Nonlinear panel unit root, Cross-section dependence, EXCHANGE-RATE REGIMES, COUNTRIES EVIDENCE, NONSTATIONARY, SPECIFICATION, TRANSMISSION, ADJUSTMENT, EXPLAIN, PUZZLE, HOLD
  • Ankara Haci Bayram Veli University Affiliated: No


This paper investigates the validity of the real interest rate parity hypothesis (RIPH) using a panel unit root approach. For this purpose, first we estimate the possible nonlinear data-generating processes of the real interest rate differential series and using these estimates determine which panel unit root test is better for analyzing the RIPH. To this end, smooth transition autoregressive and threshold autoregressive (TAR) models are estimated for two different panels of countries: G7 and post-Soviet transition economies. The results show that the data displays both strong asymmetry and high transition speed. Therefore, secondly, we propose a new panel unit root test where the alternative is stationary with asymmetric TAR adjustment, and provide their empirical power properties. Finally, we demonstrate that our newly proposed test is able to provide conclusive evidence in favor of the RIPH in contrast to the other panel unit root tests considered.