Resilient or unstable? Real rate regimes in emerging markets

Abstract We examine whether real interest rates in emerging markets are uniformly mean-reverting or instead exhibit state-dependent persistence. Using the quantile panel unit root test with common factors on a balanced monthly panel of fourteen emerging economies over 2000–2024, we estimate distribution-specific persistence while filtering pervasive global shocks. Four results emerge. First, at lower and median quantiles, the unit root null is rejected and persistence remains absent, indicating mean reversion in normal and low-rate states. Second, at upper quantiles, rejection largely disappears and local persistence approaches or exceeds unity, implying that stress episodes are markedly more durable than average dynamics suggest. Third, inflation is stationary across the distribution, whereas regime dependence in real rates is primarily transmitted through the nominal rate. Fourth, a benchmark comparison with developed economies indicates that this upper-tail regime dependence is far less pronounced outside the emerging-market sample. These findings explain why conventional mean-based panel tests can yield overly strong evidence of stationarity in emerging markets: averaging across skewed, state-dependent regimes allows tranquil observations to dominate inference and masks instability in the right tail. Economically, the upper-tail results are consistent with fear-of-floating behavior, elevated sovereign and currency risk premia, and the transmission of global monetary and dollar-financing shocks through domestic nominal rates. By aligning distribution-aware inference with state-specific differences in persistence, this analysis helps clarify when real rate parity and stability are most likely to hold in emerging markets.