Real interest parity (RIP) over the 20th century: New evidence based on confidence intervals for the largest root and the half-life

In this paper, we employ local-to-unity asymptotics to investigate the validity of real interest parity (RIP) for three countries relative to the US. Using long-span data, we find that deviations from parity are corrected quickly and this is what could, in principle, be expected to happen in an integrated world where economic forces act rapidly so that discrepancies do not grow systematically over-time. Moreover, the observed speed of reversion raises important issues for policy in that the tendency for rates to converge implies that the impact of the domestic authorities' stabilization polices might be limited. Finally, there is no clear-cut difference in the adjustment to shocks across fixed and floating regimes.