Do real interest rates converge across Latin american countries?

In this study, we apply the Sequential Panel Selection Method (SPSM), pro- posed 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 equilib- rium values in a non-linear way. Our results have important policy implications for these Latin American countries under study.info:eu-repo/semantics/publishedVersio

Johansen-type cointegration tests with a Fourier function

This article extends the pioneering Johansen cointegration test to allow for structural breaks in a cointegration system. Instead of using usual dummy variables, we utilize a Fourier function to control for an unknown number of multiple breaks in the cointegration system. The underlying presumption of the procedure is that structural breaks often can be captured by using a small number of low-frequency components from a Fourier approximation. The number of parameters to estimate is reduced significantly, which can lead to a good performance of the tests. Monte Carlo simulations show that the new tests display good size and power properties, except for the cases of sharp breaks. Then, we consider a strategy using a union of rejections. The union test combines our suggested test with a test of the cointegration rank in VAR models in the presence of a possible break in trend at an unknown point. We further consider a procedure that selects a better model using a Schwarz-type criterion among Johansen, trend break-point, and Fourier models. The resulting test shows fairly correct sizes in all cases, including sharp breaks, smooth breaks, and no breaks. The power properties are also reasonable in almost all cases. © 2022 John Wiley ; Sons Ltd.We thank the editors and two anonymous reviewers for their excellent suggestions and feedback that have greatly improved the article. In particular, one reviewer gave detailed constructive suggestions on combining complementary testing procedures. We also thank Walter Enders, Bruce Hansen, and Joon Park for comments on an earlier version of the article