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Unit roots and persistence in the nominal interest rate: a confirmatory analysis applied to the OECD

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  • Diego Romero‐Ávila
Abstract
. This paper investigates the stochastic properties of long‐term and short‐term nominal interest rates for the OECD over the post‐war era. For that purpose, we employ univariate unit root tests as well as panel unit root and stationarity tests that explicitly allow for cross‐sectional dependence. Overall, we find overwhelming evidence that the nominal interest rate contains a unit root, which may be driven by a stochastic common factor. The computation of half‐lives through impulse‐response functions also points to a high degree of persistence. This has important implications for the cointegration analysis of the Fisher equation, the uncovered interest parity, and the term structure. Ce texte analyse les propriétés stochastiques du taux d'intérêt nominal à court et à long terme pour les pays de l'OCDE dans la période de l'après guerre. Pour ce faire, on utilise des tests de racine unitaire univariée ainsi que des tests de racine unitaire de panel et des tests de stationnarité qui tiennent compte de la dépendance transversale. En général, les résultats montrent que le taux d'intérêt nominal contient une racine unitaire qui peut être commandée par un facteur stochastique commun. Le calcul des demi‐vies via des fonctions d'impulsion réponse montre qu'il y a un haut degré de persistance. Voilà qui a des implications importantes pour l'analyse de co‐intégration de l'équation de Fisher, la parité de l'intérêt non couvert, et la structure des taux d'intérêt.

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  • Diego Romero‐Ávila, 2007. "Unit roots and persistence in the nominal interest rate: a confirmatory analysis applied to the OECD," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(3), pages 980-1007, August.
    • Handle: RePEc:wly:canjec:v:40:y:2007:i:3:p:980-1007
    DOI: 10.1111/j.1365-2966.2007.00439.x
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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