Nonlinear Dynamics of Real Interest Rates across Countries
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The purpose of the paper is to contribute to the debate on the relevance of nonlinear modeling in the deviation from the real interest rate parity. Using monthly data from the post-Bretton Woods periods, we find strong evidence of the presence of nonlinearities in the behavior of the real interest differentials of five developed countries, Canada, Japan, Norway, Switzerland, and UK with respect to the United States, which appeared to be modeled well by an exponential smooth transition autoregressive model. The extent of nonlinearities varies across the sample with the Norway-US differentials exhibiting the sharpest transition from one regime to another. Large shocks to real interest parity (RIP) are more likely to lead to the reestablishment of parity at a faster rate than small shocks. Modeling the nonlinear stochastic dynamics of RIP can thus be useful for policymaking purposes in recovering information on monetary and financial crises.
Abstract
The purpose of the paper is to contribute to the debate on the relevance of nonlinear modeling in the deviation from the real interest rate parity. Using monthly data from the post-Bretton Woods periods, we find strong evidence of the presence of nonlinearities in the behavior of the real interest differentials of five developed countries, Canada, Japan, Norway, Switzerland, and UK with respect to the United States, which appeared to be modeled well by an exponential smooth transition autoregressive model. The extent of nonlinearities varies across the sample with the Norway-US differentials exhibiting the sharpest transition from one regime to another. Large shocks to real interest parity (RIP) are more likely to lead to the reestablishment of parity at a faster rate than small shocks. Modeling the nonlinear stochastic dynamics of RIP can thus be useful for policymaking purposes in recovering information on monetary and financial crises.
참고문헌 (43)
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