REAL INTEREST RATE PARITY IN EU COUNTRIES: EMPIRICAL EVIDENCE BY UNIT ROOT TEST WITH SEQUENTIAL PANEL SELECTION METHOD

This study applies the Sequential Panel Selection Method (SPSM) to examine the real interest rate parity (RIP) hypothesis for eleven European Union (EU) countries (i.e., Austria, Belgium, Spain, Finland, France, Greece, Ireland, Italy, Luxembourg, Netherlands and Portugal) over the span of April 1994 to May 2011. Overall, our empirical study provides evidence that the RIP holds in Belgium, Greece, Ireland, Luxembourg and Portugal, with Germany serving as base countries. Our results have important policy implications for the study of real interest rate parity in EU countries.