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Financial Integration of East Asian Economies: Evidence from Real Interest Parity

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Author Info
Baharumshah, Ahmad Zubaidi
Chan, Tze-Haw
Masih, A. Mansur A.
Lau, Evan

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Abstract

In this paper, we investigate the financial linkages between the East Asian economies with Japan and the US using the real interest rate parity (RIP) condition. We test for long-run RIP using an array of panel unit root tests, including a recent technique developed by Breuer et al. (2002). This study offers two important results: first, we found strong (robust) evidence that the parity condition holds in all the Asian countries, except for China. For China, there is no evidence of RIP when Japan is used as based country. Real interest differential between China and the US exhibits a tendency towards stationary equilibrium over the period 1987-2006. Second, the analysis drawn on half-life suggests that the US-Asian link has been getting stronger than the Japan-Asian one in the post-liberalization era.

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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2210.

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Date of creation: Mar 2007
Date of revision: 04 Jun 2007
Handle: RePEc:pra:mprapa:2210

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Related research
Keywords: RIP panel unit root tests half-lives

Find related papers by JEL classification:
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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  1. O'Connell, Paul G. J., 1998. "The overvaluation of purchasing power parity," Journal of International Economics, Elsevier, vol. 44(1), pages 1-19, February. [Downloadable!] (restricted)
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    Other versions:
  4. Breuer, Janice Boucher & McNown, Robert & Wallace, Myles, 2002. " Series-Specific Unit Root Tests with Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(5), pages 527-46, December. [Downloadable!] (restricted)
  5. Breuer, Janice Boucher & McNown, Robert & Wallace, Myles S, 2001. "Misleading Inferences from Panel Unit-Root Tests with an Illustration from Purchasing Power Parity," Review of International Economics, Blackwell Publishing, vol. 9(3), pages 482-93, August. [Downloadable!] (restricted)
  6. Kilian, L. & Caner, M., 1999. "Size Distortions of Tests of the Null Hypothesis of Stationarity: Evidence and Implications for the PPP Debate," Papers 99-05, Michigan - Center for Research on Economic & Social Theory.
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  7. 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. [Downloadable!] (restricted)
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  9. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I. [Downloadable!] (restricted)
  10. Harris, Richard D. F. & Tzavalis, Elias, 1999. "Inference for unit roots in dynamic panels where the time dimension is fixed," Journal of Econometrics, Elsevier, vol. 91(2), pages 201-226, August. [Downloadable!] (restricted)
  11. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July. [Downloadable!] (restricted)
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  12. Andrew Levin & Chien-Fu Lin, 1993. "Unit Root Tests in Panel Data: New Results," University of California at San Diego, Economics Working Paper Series 93-56, Department of Economics, UC San Diego. [Downloadable!]
  13. Darren Pain & Ryland Thomas, . "Real Interest Rate Linkages: Testing for Common Trends and Cycles," Bank of England working papers 65, Bank of England. [Downloadable!]
  14. Taufiq Choudhry, 2005. "Asian Currency Crisis and the Generalized PPP: Evidence from the Far East," Asian Economic Journal, East Asian Economic Association, vol. 19(2), pages 137-157, 06. [Downloadable!] (restricted)
  15. Karfakis, Costas, 1996. "Testing the Intertemporal Model of the Current Account: Some Evidence from Greece," Applied Economics Letters, Taylor and Francis Journals, vol. 3(12), pages 759-62, December. [Downloadable!] (restricted)
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