A re-examination of real interest parity in CEECs using old and new generations of panel unit root tests

Abstract

This study applies old and new generations of panel unit root tests to test the validity of long-run real interest rate parity (RIP) hypothesis for ten Central and Eastern European Countries (CEECs) with respect to the Euro area and an average of the CEECs' real interest rates, respectively. When the panel unit root tests are carried out with respect to the Euro area rate, we confirm the results of previous studies which support the RIP hypothesis. Nevertheless, when the test is performed using the average of the CEECs' rate, our results are mitigated, revealing that the hypothesis of CEECs' interest rates convergence cannot be taken for granted. From a robustness analysis perspective, our findings indicate that the RIP hypothesis for CEECs should be considered with cautions, being sensitive to the benchmark.