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This paper tests for real interest rate parity (RIRP) among the 17 major Organisation for Economic Cooperation and Development countries over the period 1978:Q1-2006:Q1. The econometric methods applied consist of combining the use of panel data tests that are valid under cross-section dependence and the presence of multiple structural breaks. This feature is important because the misspecification errors due to not accounting for structural breaks and-or cross-section dependence can lead to misleading conclusions. Our results support the fulfilment of the weak version of the RIRP for short-term interest rate differentials once dependence and structural breaks are considered. Adapted from the source document.

In this paper we test for real interest parity (RIRP) among the 19 major OECD countries over the period 1978:Q1–2006:Q1 using both short‐ and long‐run definitions of interest rates. Once the independence hypothesis is rejected among these series, we test for RIRP using panel data unit root and stationarity tests based on common factor models that allow for pervasive forms of dependence. Our results indicate that there is no evidence in favor of the weak version of the RIRP since one of the common factors that have been estimated is non‐stationary.