Mean reversion of interest rates in the Eurocurrency market

One stylised fact to emerge from the empirical analysis of interest rates i s that the unit-root hypothesis in nominal interest rates cannot be rejecte d. However, using the panel date unit-root test IM, Pesaran and Shin (1997) , we find support for the mean-reverting property of Eurocurrency rates. Th us, neither a vector-error-correction model nor a vector autoregressive mod el in differences is appropriate for modelling Eurocurrency rates. Instead, conventional modelling strategies with level data are appropriate. Further more, the finding of stationary interest rates supports uncovered interest parity, and hence the convergence hypothesis of interest rates. This in tur n suggests a limited role for a monetary authority to affect domestic inter est rates.