Real Interest Rate Parity: Long-Run and Short-Run Analysis Using Wavelets

In this article, long-run and short-run relationships among real interest rates in G-7 countries are empirically analyzed. The evidence suggests the existence of long-run relationships among these real interest rates. However, the long-run relationship is not an equality relationship. Short-run relationships are estimated using dynamic simultaneous equation models. They reveal that the real interest rates of non-U.S. G-7 countries react and adjust to long-run disequilibrium conditions. A more detailed analysis based on wavelet transform indicates the existence of both short-run and long-run relationships; however, strict interest rate parity does not seem to hold true.JEL Classification: C22, E43, G15