On Real Interest Rate Persistence: The Role of Breaks

Abstract

The role of structural breaks in long spans of ex-post real interest rates for ten industrialized countries is studied. First, the persistence of the real interest is assessed with newly proposed low-frequency tests of Müller and Watson (2008). Second, the test of Leybourne et al. (2007) for a change in persistence of a time-series is applied to the real interest rate. The results show that real interest rates over the full sample period do not fit a covariance-stationary or unit-root model, nor a fractionally-integrated, near-unit-root or local-level model. Instead, the persistence of real rates changes over time and there are periods when the real rate is covariance stationary and other periods when it follows a unit root process.