In a recent paper, Gagnon and Unferth (1995). [Is there a real world interest rate? J. Int. Money Finance 14, 845-855] test the hypothesis of real interest rate equality by regressing real interest rates for all major countries on dummy variables for each country and each period. We show that this model can be interpreted as an application of the stochastic approach to index numbers. This approach leads to estimates of, and standard errors for, the real rate for the world as a whole, which have appealing index-number interpretations and foundations. We also extend Gagnon and Unferth's approach by weighting countries to recognise their differing importance in the world economy, in terms of relative GDP and trade. Weighting does not lead to appreciable changes in the results. However, when the WPI, which gives more prominence to goods entering into international trade, is used as the deflator, our results indicate that real rates are equalized internationally. (C) 1999 Elsevier Science Ltd. All rights reserved.
|Journal||Journal of International Money and Finance|
|Publication status||Published - 1999|