BRIEF EMPIRICS OF INTEREST - RATE DIFFERENTIAL IN MACEDONIA
AbstractThe aim of this paper is to empirically test the order of integration of the differential of the referent interest rates in Macedonia and Euro zone, in order to confirm or reject the hypothesis of interest-rate convergence in Macedonia. Namely, the strategy of exchange-rate pegging puts monetary policy on an autopilot which immediately shrinks domestic inflation at Euro zone's level, but is expected to lead to interest-rates convergence too. We utilize three less-known tests in the literature of series' integration: KPSS, Geweke and Porter-Hudak test and Robinson test and we find support for the hypothesis that interest rates are in a process of catching up, which implies that their integration level is about 0.87, hence confirming that the convergence is not yet achieved, but is underway.
Baum, C. (2004) Kwiatkowski-Phillips-Schmidt-Shin test for stationarity. Boston College, help file, p.1-3.
Bernard, A.B. and Durlauf, S.N. (1995) Convergence in international output. Journal of Applied Econometrics, 10, p.97-108.
Fountas, S. and Wu, J.L. (1998) Tests for interest rate convergence and structural breaks in the EMS. Applied Financial Economics, 8, p.127-132.
Pigott, C. (1994) International interest rate convergence: a survey of the issues and evidence.
Federal Reserve Bank of New York, (winter), p.24-37.
Baillie, R. (1996) Long Memory Processes and Fractional Integration in Econometrics, Journal of Econometrics, 73, 5-59.
Geweke, J. and Porter-Hudak, S. (1983) The Estimation and Application of Long Memory Time Series Models, Journal of Time Series Analysis, 221-238.
Robinson, P.M. (1995) Log-Periodogram Regression of Time Series with Long Range Dependence. Annals of Statistics, 23:3, 1048-1072.
Andrews, D. W. K. (1991) Heteroskedasticity and autocorrelation consistent covariance matrix estimation. Econometrica, 59: 817-858.
Hobijn, B., Franses, P. H. and Ooms, M. (1998) Generalizations of the KPSS-test for stationarity.
Econometric Institute Report 9802/A, Econometric Institute, Erasmus University Rotterdam.
(available from: http://www.feweb.vu.nl/econometricLinks/ooms/papers/ei9802.pdf)
Kwiatkowski, D., Phillips, P. C. B., Schmidt, P. and Shin, Y. (1992) Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? Journal of Econometrics, 54: 159-178.
Lee, D. and Schmidt, P. (1996) On the power of the KPSS test of stationarity against fractionally-integrated alternatives. Journal of Econometrics, 73: 285-302.
Newey, W. K. and West, K. D. (1994) Automatic lag selection in covariance matrix estimation. Review of Economic Studies, 61, 631-653.
Schwert, G. W. (1989) Tests for unit roots: A Monte Carlo investigation. Journal of Business and Economic Statistics, 7, 147-160.
Obstfeld, M. and Rogoff, K. (1995) The Mirage of Fixed Exchange Rates. Journal of Economic Perspectives, 9(4), p.73-96.
Camarero, M., Ordonez, J. and Tamarit, C.R. (2002) tests for interest rate convergence and structural breaks in the EMS: Further analysis. Applied Financial Economics, 12, p.447-456.