An Encompassing Test of Real Interest Rate Equalization

Much confusion about the real interest rate connection amongst different countries may result from a narrow approach to analyzing the data. Using an encompassing methodology that accommodates many different types of times-series processes, we find that real interest rates are mean-reverting long-memory variables. We show that cointegration methodology can often fail in this environment. Using a more general approach, we detect a limited connection between real interest rates across countries. In particular, Germany is connected with several European countries, but the US is connected only with Canada and possibly the United Kingdom. Copyright © 2008 The Authors; Journal compilation © 2008 Blackwell Publishing Ltd.