Politická ekonomie 2025, 73(3):528-565 | DOI: 10.18267/j.polek.1448

Testing Real Interest Rate Parity for EU5 Countries: 200 Years of Data, Non-normality, Non-linearity and Breaks

Veli Yilanci ORCID..., Onder Ozgur ORCID...
Veli Yilanci (Faculty of Political Sciences, Department of Economics, Canakkale Onsekiz Mart University, Canakkale, Turkey
Onder Ozgur (corresponding author), Faculty of Political Sciences, Department of Economics, Ankara Yildirim Beyazit University, Ankara, Turkey

Purpose: This paper aims to examine the real interest rate parity (RIP) theory for EU5 countries (France, Germany, Italy, Spain and the UK) versus the USA. Design/methodology/approach: Utilizing RALS-FADF and RALS-FKSS unit root tests, this study addresses non-normality, non-linearity and structural breaks in real interest rate differentials. Findings: The results confirm the RIP theory, indicating mean reversion of real interest rate differentials and highlighting impact of financial integration on monetary policy independence and arbitrage opportunities. The study notes that central banks' ability to influence domestic economies through interest rates is limited due to global financial interconnectedness. Originality/value: The paper offers a new test and bases its empirical setup on whether interest rate differentials are non-normally distributed. The test also considers real interest rate non-linearity and the non-normality in the analysis.

Keywords: Real interest rate parity, unit root, Fourier approximation, structural breaks, European countries, RALS terms, non-linearity
JEL classification: C22, E43, F41

Received: February 10, 2024; Revised: June 11, 2024; Accepted: June 24, 2024; Prepublished online: June 17, 2025; Published: June 19, 2025  Show citation

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Yilanci, V., & Ozgur, O. (2025). Testing Real Interest Rate Parity for EU5 Countries: 200 Years of Data, Non-normality, Non-linearity and Breaks. Politická ekonomie, 73(3), 528-565. doi: 10.18267/j.polek.1448
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