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Financial Integration in the Pacific Basin Region: RIP by PANIC Attack?

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Author Info
Somchai Amornthum () (Department of Economics, University of Hawaii at Manoa, University of Hawaii Economic Research Organization)
Carl Bonham () (Department of Economics, University of Hawaii at Manoa, University of Hawaii Economic Research Organization)

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Abstract

We exploit advances in panel data econometrics to test whether real interest parity holds in the Pacific Basin region. We test for a unit root in the difference between either the US, Japanese or Euro area real interest rate and the real interest rates from a panel of eleven Pacific Basin economies. Unlike extant studies which test for RIP using panel data, we use Bai and Ng's (2004) PANIC test which allows for a very general model of cross-section dependence, including the possibility of cross-unit cointegration. Ignoring the possibility of cross-unit cointegration can lead to severe size distortions and to an over-rejection of the null hypothesis of a unit root. We overturn earlier findings based on first generation panel tests, and demonstrate that cross-unit cointegration lead to incorrect conclusions. We find that RIP holds in the Pacific region. Real interest rates converge to the US rate. We find no support for the hypothesis that Pacific Basin real interest rates converge to either the Japanese or Euro area rates.

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File URL: http://www.economics.hawaii.edu/research/workingpapers/WP_08-2.pdf
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Publisher Info
Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 200802.

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Length: 37 pages
Date of creation: 26 May 2008
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Handle: RePEc:hai:wpaper:200802

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Related research
Keywords: Real Interest Parity; Pacific-Basin Capital Market Integration; Panel Unit Root; PANIC.;

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data

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    Other versions:
  3. Jushan Bai & Serena Ng, 2004. "A PANIC Attack on Unit Roots and Cointegration," Econometrica, Econometric Society, vol. 72(4), pages 1127-1177, 07. [Downloadable!] (restricted)
    Other versions:
  4. Wu, Jyh-Lin & Fountas, Stilianos, 2000. "Real Interest Rate Parity under Regime Shifts and Implications for Monetary Policy," Manchester School, University of Manchester, vol. 68(6), pages 685-700, December. [Downloadable!] (restricted)
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  6. Aggarwal, Raj & Mougoue, Mbodja, 1996. "Cointegration among Asian currencies: Evidence of the increasing influence of the Japanese yen," Japan and the World Economy, Elsevier, vol. 8(3), pages 291-308, September. [Downloadable!] (restricted)
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  15. Holmes, Mark J., 2002. "Does long-run real interest parity hold among EU countries? Some new panel data evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(4), pages 733-746. [Downloadable!] (restricted)
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