Abstract
In this study, we apply the Sequential Panel Selection Method (SPSM), proposed by Chortareas and Kapetanios (Journal of Banking and Finance 33:390–404, 2009), to investigate and assess the non-stationary properties of the real interest rate parity (RIRP) for fourteen Latin American countries. Utilizing the SPSM, we can classify the entire panel into a group of stationary series and a group of non-stationary series. We clearly identify how many and which series in the panel are stationary processes and provide robust evidence that clearly indicate RIRP holds true for ten countries. Our findings note that these countries’ real interest rate convergence is a mean reversion toward RIRP equilibrium values in a non-linear way. Our results have important policy implications for these Latin American countries under study.
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Notes
Enders and Lee (2012) suggested that the frequencies in Equation (8) should be obtained by minimizing the sum of the squared residuals. However, their Monte Carlo experiments suggest that no more than one or two frequencies should be used because of the loss of power associated with a larger number of frequencies.
The effective interest rate is calculated as if compounded annually. The effective rate is calculated in the following way, where r is the effective annual rate, i the nominal rate, and n the number of compounding periods per year: r = (1+i/n)n - 1
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Zhang, W.L., Chang, HL. & Su, CW. Do real interest rates converge across Latin american countries?. Port Econ J 13, 117–130 (2014). https://doi.org/10.1007/s10258-014-0101-y
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DOI: https://doi.org/10.1007/s10258-014-0101-y