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Real interest parity: Evidence from trade partnerships
Author(s) -
Boamah Mustapha Ibn
Publication year - 2018
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2017.10.002
Subject(s) - economics , international economics , interest rate parity , unit root , interest rate , real interest rate , parity (physics) , european union , price index , general partnership , international trade , monetary economics , macroeconomics , econometrics , finance , physics , particle physics
This study investigates real interest parity ( RIP ) in trade partnerships, and whether RIP depends on the type of trade partnership, using short term interest rates and the Consumer Price Index ( CPI ) obtained from the Organization for Economic Cooperation and Development ( OECD ) database between 1975 and 2016. The investigation employs unit root and stationarity tests on interest rate differentials to study RIP between countries using Germany, United States, and Japan as base countries for selected countries in the European Union ( EU ), member countries of the North American Free Trade Agreement ( NAFTA ) and selected Asian countries respectively. The results show evidence in favor of RIP in the selected EU countries. The interest rate differentials of Belgium, France, Italy, Spain and the UK with respect to Germany confirms a long‐run relationship and real interest rate parity. There is also evidence to support the RIP in the other trade partnerships. With the exception of Mexico, the interest rate differentials for all the countries are stationary, and each quickly reverts to its mean.