Testing the RIP Hypothesis for EU5 Countries Over Two Centuries: Nonnormality, Nonlinearity and Structural Breaks

Yılancı V., Özgür Ö.

POLITICKA EKONOMIE, no.Forthcoming, pp.1-20, 2024 (SSCI)

  • Publication Type: Article / Article
  • Publication Date: 2024
  • 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.1-20
  • 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 US.

Design/methodology/approach: Utilizing RALS-FADF and RALS-FKSS unit root tests, this

study addresses nonnormality, nonlinearity, and structural breaks in real interest rate

differentials.

Findings: Results confirm RIP theory, indicating mean reversion of real interest rate

differentials and highlighting financial integration’s impact 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

nonlinearity and the nonnormality in the analysis.