Holmes, M. J., & Wang, P. (2008). Real Convergence and the EU Accession Countries: A New Perspective on Real Interest Parity. Journal of Emerging Market Finance, 7(3), 215-236.
Permanent Research Commons link: http://hdl.handle.net/10289/8322
We test for long–run real interest rate parity involving the ten new member states that joined the European Union in 2004 and the US, UK and Germany. We utilise a novel panel data approach whereby unit root tests are conducted within a seemingly unrelated regression framework. This procedure provides increased power over univariate unit root tests and offers key advantages over existing panel data tests insofar as cross–sectional dependency is addressed and individual stationary panel members are identified. In contrast to existing peripheral Eurozone members, we find that a majority of the new member states are characterised by real interest parity.
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