Abstract
We test for real interest rate parity using data from six European countries (France, Germany, Italy, the Netherlands, Spain, and the United Kingdom), Japan, and the United States over a period of more than two centuries. Our contribution is threefold. First, we implement a wavelet-based analysis, which examines both frequency and time information contained in a time series. Second, we employ the United States, the United Kingdom, and Germany as alternative base countries in the wavelet regressions to ascertain the sensitivity of the results to the choice of the base country. Third, we test the real interest rate parity over the entire period (1800–2018) and for several non-contiguous subperiods that hold historical significance and relative importance. Three subperiods link to the three globalization waves (1870–1914, 1944–1971, and 1989–2018), and four subperiods connect to the exchange rate regimes. The wavelet-based results suggest that the validity of the real interest rate parity is scale-dependent. The specific evidence in most cases supports the parity at lower frequencies but not at higher frequencies, which is consistent with the idea that the purchasing power parity and uncovered interest parity, the two main ingredients of the real interest rate parity, are mostly valid in the long run.
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Author contributions: Conceptualization: Mahdi Ghaemi Asl, Giorgio Canarella, Stephen M. Miller, Hamid Reza Tavakkoli. Methodology: Mahdi Ghaemi Asl, Giorgio Canarella, Hamid Reza Tavakkoli. Formal analysis and investigation: Mahdi Ghaemi Asl, Giorgio Canarella, Stephen M. Miller; Writing – original draft preparation: Mahdi Ghaemi Asl, Giorgio Canarella, Stephen M. Miller, Hamid Reza Tavakkoli. Writing – review and editing: Mahdi Ghaemi Asl, Giorgio Canarella, Stephen M. Miller. Resources: Mahdi Ghaemi Asl, Giorgio Canarella, Stephen M. Miller, Hamid Reza Tavakkoli. Supervision: Mahdi Ghaemi Asl, Giorgio Canarella, Stephen M. Miller.
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Research funding: No funds, grants, or other support was received.
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Conflict of interest statement: The authors have no relevant financial or non-financial interests to disclose.
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Supplementary Material
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Articles in the same Issue
- Frontmatter
- Research Articles
- Approximate Bayesian inference for agent-based models in economics: a case study
- Anticipating extreme losses using score-driven shape filters
- Does real interest rate parity really work? Historical evidence from a discrete wavelet perspective
- The impact of forward guidance and large-scale asset purchase programs on commodity markets
- Middle-income traps and complexity in economic development
- Bayesian inference for order determination of double threshold variables autoregressive models
- Score-driven multi-regime Markov-switching EGARCH: empirical evidence using the Meixner distribution