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Dynamic Financial Linkages of Japan and ASEAN Economies: An Application of Real Interest Parity

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  • Chan, Tze-Haw
  • Khong, Wye Leong Roy
  • Baharumshah, Ahmad Zubaidi

Abstract

To examine the validity of real interest parity (RIP), this study provides empirical evidences concerning the dynamic linkages of real interest rates among ASEAN-5 and the mean reversion behaviors of real interest differentials of ASEAN-5.vis-à-vis Japan during the post liberalization era (1984-1997). The upshots of our findings are four-fold. First, there were co-movement of ASEAN real rates in the long run and dynamic causalities in the short run, which explicitly indicated a monetary inter-dependency among the ASEAN tigers. Second, most of the forecast error variance of real interest rates in own country can be attributed to other ASEAN-4’s innovations (more than 50%), which partly explain the contagion effects during Asia crisis 1997/98. Third, the real interest differentials are mean reverting over time, implying that RIP holds between Japan and ASEANs (except Singapore). Forth, the half-lives are reported at approximately 6 to 11 months, which reflect the considerably small deviations from RIP. All together, the findings constitute towards regional financial integration with the Japan’s leading role being confirmed. To great extent, this would support the recent proposal of Currency Union with Japanese Yen taken as common currency.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2209.

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Date of creation: 2003
Date of revision: 2003
Publication status: Published in Capital Markets Review special issue.11 (1 (2003): pp. 23-40
Handle: RePEc:pra:mprapa:2209

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Keywords: Real interest linkages; real interest differentials; cointegration; mean reversion; half-life; financial integration;

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References

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  1. Lemmen, J.J.G. & Eijffinger, S.C.W., 1993. "The quantity approach to financial integration: The Feldstein-Horioka criterion revisited," Discussion Paper 1993-20, Tilburg University, Center for Economic Research.
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  3. 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.
  4. Kilian, L. & Zha, T., 1999. "Quantifying the Half-Life of Deviations from PPP: The Role of Economic Priors," Working Papers 450, Research Seminar in International Economics, University of Michigan.
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  10. Phylaktis, Kate, 1999. "Capital market integration in the Pacific Basin region: an impulse response analysis," Journal of International Money and Finance, Elsevier, vol. 18(2), pages 267-287, February.
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Cited by:
  1. Chan, Tze-Haw & Baharumshah, Ahmad Zubaidi & Lau, Evan, 2005. "Real Financial Integration among the East Asian Economies: A SURADF Panel Approach," MPRA Paper 2021, University Library of Munich, Germany, revised Feb 2007.
  2. Chan, Tze-Haw, 2008. "International Parities among China and Her Major Trading Partners in Asia Pacific," MPRA Paper 15504, University Library of Munich, Germany, revised 06 Apr 2009.

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