Unit roots and persistence in the nominal interest rate: a confirmatory analysis applied to the OECD

This paper investigates the stochastic properties of long-term and short-term nominal interest rates for the OECD over the post-war era. For that purpose, we employ univariate unit root tests as well as panel unit root and stationarity tests that explicitly allow for cross-sectional dependence. Overall, we find overwhelming evidence that the nominal interest rate contains a unit root, which may be driven by a stochastic common factor. The computation of half-lives through impulse-response functions also points to a high degree of persistence. This has important implications for the cointegration analysis of the Fisher equation, the uncovered interest parity, and the term structure.