'Faculty of Economics and Business, University of Zagreb'
Abstract
In this paper we investigate the real interest parity condition in ten Eastern European transition countries during
1997-2009 period. Our sample is interesting for three reasons: It covers the second stage of economic transition
in the aftermath of the collapse of socialism; the establishment of Euroland at the turn of the century: and
enlargement of Euroland to include the Eastern European countries of Slovenia and Slovakia. The data enables
us to investigate how the introduction of market mechanisms in the early nineties and the establishment and
enlargement of Euroland acted on real interest rate convergence. We test the real interest parity condition with
unit root test with and without structural breaks. Inflationary expectations are estimated in two ways: (i) under
assumption of rational expectations with ex-post inflation rates and (ii) with ex-ante estimated inflation
expectation using ARIMA/ARCH model. Preliminary results suggest that there is a strong evidence of
stationarity and relatively weaker evidence of structural breaks
