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Mean Reversion in the Real Interest Rate and the Effects of Calculating Expected Inflation
Author(s) -
Norrbin Onsurang,
Smallwood Aaron D.
Publication year - 2011
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/0038-4038-78.1.107
Subject(s) - mean reversion , unit root , autoregressive model , econometrics , unit root test , inflation (cosmology) , monte carlo method , long memory , null hypothesis , contrast (vision) , statistics , real interest rate , mathematics , exponential function , economics , interest rate , computer science , cointegration , macroeconomics , volatility (finance) , mathematical analysis , physics , artificial intelligence , theoretical physics
We investigate the measured persistence in the real interest rate using a variety of methods to annualize inflation and calculate the real rate. Results from a battery of conventional unit root tests yield conflicting conclusions for the various real rates, adding to an existing confusion regarding mean reversion. Both long memory and exponential smooth‐transition autoregressive models (ESTAR) nonlinearity are considered as possible alternatives, and in contrast to the unit root test results, we find highly robust evidence against the unit root null. Based on the empirical results, Monte Carlo analysis is performed to study the disparate results obtained using fractional integration and unit root tests.