posted on 2005-08-12, 16:29authored byMark J. Holmes, Nabil Maghrebi
This study tests for non-linearities in the real interest
differentials of four South East Asian economies with respect to
Japan and the U.S. The logistic and exponential smooth
transition regression models are applied to monthly data over
the sample period 1977M1-2000M3. There is evidence of nonlinearities
in Asian real interest differentials where nonlinearities
are often captured by the logistic smooth transition
autoregressive model. The extent of non-linearities varies across
the sample with the Singapore-Japan and Thailand-Japan
differentials exhibiting the sharpest transition from one regime
to another. Large shocks to real interest parity are more likely
to lead to the reestablishment of parity at a faster rate than
small shocks. Modeling the non-linear stochastic dynamics of
real interest parity can thus be useful for policy-making
purposes in recovering information on monetary and financial
crises.