School of Economics

2003 Discussion Papers

School of Economics Discussion Paper 03/01
August, 2003

Does the Real Interest Parity Hypothesis Hold? Evidence for Developed and Emerging Markets
Alex Luiz Ferreira and Miguel León-Ledesma

School of Economics
University of Kent at Canterbury

Abstract

Evidence is presented on the Real Interest Parity Hypothesis for a set of emerging and developed countries. This is done by carrying out a set of unit-root tests on the real interest differentials with respect to Germany and the US. Our results support the hypothesis of a rapid reversion towards a zero differential for developed countries and towards a positive one for emerging markets. An important result is that this adjustment tends to be highly asymmetric and markedly different for developed and emerging countries. Our evidence reveals a high degree of market integration for developed countries and highlights the importance of risk premia for emerging markets.

JEL Classification: F32, F21, C22

Keywords: Real Interest Rate Differentials, Market Integration, Unit Roots, Asymmetric adjustment

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