Markov-switching mean reversion in short-term interest rates: Evidence from East Asian economies
This paper employs a Markov-switching approach to model the dynamics of East Asian short rates. Regime changes are incorporated in standard unit root test to reveal periodic changes in the stationarity property of interest rates. There is evidence that three of the five short rates follow a random walk process in tranquil and low rates episodes but mean-revert in periods when rates are high and volatile. Singapore short rates are characterised by a random walk process, whereas the Philippines rates behave as a mean-reverting process in both regimes. Factors such as exchange rates, monetary policy and interest rate differentials vis-à-vis US interest rates influence the likelihood of short rates being in a volatile state. The regime switching dynamics of interest rates carry important implications for policy-makers.