Fin De Siecle Real Interest Parity

In this essay, we evaluate the recent evidence for real interest parity, focusing on long-term yields. Examining the data on financial instruments of various maturities across the G7 countries, we find substantial differences in the degree of real interest equalization measured at different horizons. In general, real interest parity, up to a constant holds better at long horizons than at short. The empirical result stands robust to alternative ways of modeling expected inflation rates. Considering the relevance of the long-term yields for investment decisions of firms to borrow in the capital markets, our findings imply that the degree of capital mobility among the G7 economies may be greater than previously thought