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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
2209.
Length: Date of creation: 2003 Date of revision:
2003 Publication status: Published in Capital Markets Review special issue.11 (1 & 2)(2003): pp. 23-40 Handle: RePEc:pra:mprapa:2209
Find related papers by JEL classification: F15 - International Economics - - Trade - - - Economic Integration F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
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