Giorgio Canarella and Stephen M. Miller (both Economics and Center for Business and Economic Research) published "Globalization, Long Memory, and Real Interest Rate Convergence: A Historical Perspective," with Luis A. Gil-Alana (University of Navarra) and Rangan Gupta (University of Pretoria) in Empirical Economics, 2022. This paper investigates the validity of real interest rate parity (RIRP) during three waves of globalization (1870-1914, 1944-1971, 1989 to the present). These periods should favor RIRP since globalization is a process where economies and financial markets become increasingly integrated into a global economic system. Unlike the existing literature, they model departures from RIRP as long-term memory processes and apply fractional integration methods on samples of real interest rate differentials of seven developed countries: France, Germany, Holland, Italy, Japan, Spain, and the UK across the three globalization waves paired against the U.S. They find that deviations from RIRP are mean reverting, providing robust evidence of real interest rate convergence during the three globalization waves. They shed further light on financial and commodity market integration during the three globalization waves by assessing the memory properties of uncovered interest rate parity (UIP) and relative purchasing power parity (PPP) differential processes. They find that deviations from relative PPP and UIP are not always mean-reverting processes.
