Testing Real Interest Rate Parity for EU5 Countries: 200 Years of Data, Non-normality, Non-linearity and Breaks

Yılancı V., Özgür Ö.

POLITICKA EKONOMIE, vol.73, no.3, pp.528-565, 2025 (SSCI)

  • Publication Type: Article / Article
  • Volume: 73 Issue: 3
  • Publication Date: 2025
  • Doi Number: 10.18267/j.polek.1448
  • Journal Name: POLITICKA EKONOMIE
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus, International Bibliography of Social Sciences, ABI/INFORM, EconLit, PAIS International, Political Science Complete, Sociological abstracts, Worldwide Political Science Abstracts
  • Page Numbers: pp.528-565
  • Çanakkale Onsekiz Mart University Affiliated: Yes

Abstract

Purpose: This paper aims to examine the real interest rate parity (RIP) theory for EU5 countries

(France, Germany, Italy, Spain and the UK) versus the USA. Design/methodology/approach:

Utilizing RALS-FADF and RALS-FKSS unit root tests, this study addresses non-normality, non-

linearity and structural breaks in real interest rate differentials. Findings: The results confirm

the RIP theory, indicating mean reversion of real interest rate differentials and highlighting impact

of financial integration on monetary policy independence and arbitrage opportunities. The study

notes that central banks’ ability to influence domestic economies through interest rates is limited

due to global financial interconnectedness. Originality/value: The paper offers a new test and

bases its empirical setup on whether interest rate differentials are non-normally distributed.

The test also considers real interest rate non-linearity and the non-normality in the analysis.