Real Interest Rate Parity in the Northeast Asian Countries: Evidence from the Quantile Unit Root Test

Abstract

The main purpose of examining real interest rate parity (RIRP), focus on explore more evidence from the quantile unit root test. This study applies the Quantile unit root test to assess the validity of the RIRP for Northeast Asian countries (including Russia, Mongolia, Mainland of China, South Korea and Japan) relative to the USA. In this paper, I examine the validity of RIRP from the nonlinear point of view and evidence obviously indicates that RIRP holds true for two countries. It implies that the operations and effectiveness of the monetary policies in these countries will be highly influenced by the exterior factors originating from the USA. At the same time, my results point out their real interest rate convergence relative to the USA is mean reversion towards RIRP equilibrium values in a nonlinear way.The time series of all the countries from ADF and PP tests are non-stationary. By contrast, the KPSS tests with constant reject the stationary for all countries. According to QKS, RIRP of Japan and Russia are affected by USA. Meanwhile, China, South Korea and Mongolia do not support RIRP. Furthermore, central bank of China, South Korea and Mongolia could be pursue their independent monetary policies means that central bank does not follow market mechanism.In this paper focus on those countries that uses the macroeconomic variables includes consumer price index (CPI), inflation rate (INF), nominal interest rate (NIR), real interest rate (RIR) and real interest rate parity (RIRP). The data are collected at monthly started period for these countries are different cause the data availability, and the end of the sample is 2015M12 for all countries.