Testing the Real Interest Parity Hypothesis in Six Developed Countries

Abstract

In this paper, we conduct unit-root tests (including ADF, PP, KPSS and DF-GLS tests) on the ex post real interest rates in six developed countries (Canada, France, Japan, Italy, Singapore, the UK against the US). We also use real interest rate differential (RID) to examine whether real interest rate parity holds in these countries. Our result supports that real interest rates are mean reverting and the real interest parity (RIP) hypothesis holds in the majority of the chosen countries.