Stephen M. Miller (Center for Business and Economic Research, Economics) published an article, “Does real interest rate parity really work? Historical evidence from a discrete wavelet perspective,’ with Mahdi Ghaemi Asl, Kharazmi University; Giorgio Canarella, California State University Los Angeles; and Hamid Reza Tavakkoli, Imam Sadiq University in Studies in Nonlinear Dynamics and Econometrics.
We test for real interest rate parity using data from France, Germany, Italy, the Netherlands, Spain, the United Kingdom, Japan, and the United States over a period of more than two centuries. Our contribution is threefold. First, we implement a wavelet-based analysis. Second, we employ the United States, the United Kingdom, and Germany as alternative base countries in the wavelet regressions. Third, we test the real interest rate parity over the entire period (1800–2018) and for several non-contiguous subperiods that hold historical significance and relative importance. Three subperiods link to the three globalization waves and four subperiods connect to the exchange rate regimes. The wavelet-based results suggest that the validity of the real interest rate parity is scale-dependent. The specific evidence in most cases supports the parity at lower frequencies but not at higher frequencies.