Testing Real Interest Parity in Emerging Markets

The paper finds significant deviations between short-term emerging market real interest rates and world real interest rates primarily due to the inflationary expectations of the local investor base. We test for long-run real interest convergence in emerging markets using a time varying panel unit ro...

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Bibliographic Details
Main Authors: Banerjee, Abhisek, Singh, Manmohan
Format: eBook Book
Language:English
Published: Washington International Monetary Fund 01.11.2006
Edition:1
Subjects:
Adjustment Process
Developing countries
Econometric models
Economic Models
Foreign Investment
Interest rates
Pesaran's Cadf Test
Real Interest Parity
Real Interest Rates
Short-term Local Emerging Market Debt
Single Variables: Models with Panel Data
Long-term Capital Movements
International Investment
Debt
Short-term Capital Movements
Single Equation Models
Single Variables: Time-Series Models
Current Account Adjustment
ISBN:1451995407, 9781451909623, 1451865090, 9781451865097, 1451909624, 9781451995404
Online Access:Get full text
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Summary:The paper finds significant deviations between short-term emerging market real interest rates and world real interest rates primarily due to the inflationary expectations of the local investor base. We test for long-run real interest convergence in emerging markets using a time varying panel unit root test proposed by Pesaran to capture the improved macro-economic fundamentals since early 1990s. We also estimate the speed of convergence in the presence of a shock. The paper suggests that real interest rates in the emerging markets show some convergence in the long run but real interest parity does not hold. Our results also find that the speed of adjustment of real rates to a shock is estimated to differ significantly across the emerging markets. Measured by their half-life, some emerging markets in Asia, E.Europe and S.Africa, where real interest rates are generally low, take much longer to adjust than where real interest rates are generally high (Latin America, Turkey). From a policy perspective, encouraging foreign investors to take direct exposure at the short end of the local debt market could lower the real interest rates in some emerging markets.
ISBN:1451995407
9781451909623
1451865090
9781451865097
1451909624
9781451995404