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

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  • Baharumshah, Ahmad Zubaidi
  • Chan, Tze-Haw
  • Masih, A. Mansur A.

Abstract

In this paper, we investigate the financial linkages between the East Asian countries with Japan and the US using the real interest rate parity (RIP) condition. This study offers three important results: first, we find strong (robust) evidence that RIP condition holds in all the Asian countries, except for China. Based on SURADF tests, we conclude that South Korea and the ASEAN-5 countries are financially integrated with the global financial markets namely, Japan and the US. Second, we also confirmed the real interest rate differentials between Japan and the US exhibits strong tendency towards a stationary equilibrium. Third, the analysis drawn on half-life suggests that the US-Asian link has been getting stronger than the Japan-Asian one in post-liberalization era

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Bibliographic Info

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

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Date of creation: 2005
Date of revision: 2007
Handle: RePEc:pra:mprapa:2210

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Keywords: RIP; panel unit root tests; half-lives;

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  1. 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, Wiley Blackwell, Wiley Blackwell, vol. 9(3), pages 482-93, August.
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  6. 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, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
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  10. Taufiq Choudhry, 2005. "Asian Currency Crisis and the Generalized PPP: Evidence from the Far East," Asian Economic Journal, East Asian Economic Association, East Asian Economic Association, vol. 19(2), pages 137-157, 06.
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  13. Darren Pain & Ryland Thomas, 1997. "Real Interest Rate Linkages: Testing for Common Trends and Cycles," Bank of England working papers, Bank of England 65, Bank of England.
  14. Costas Karfakis, 1996. "Testing the intertemporal model of the current account: some evidence from Greece," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 3(12), pages 759-762.
  15. Phylaktis, Kate, 1999. "Capital market integration in the Pacific Basin region: an impulse response analysis," Journal of International Money and Finance, Elsevier, Elsevier, vol. 18(2), pages 267-287, February.
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Citations

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Cited by:
  1. Reuven Glick & Michael Hutchison, 2013. "China’s financial linkages with Asia and the global financial crisis," Working Paper Series, Federal Reserve Bank of San Francisco 2013-12, Federal Reserve Bank of San Francisco.
  2. Liu, Yan & Chang, Hsu-Ling & Su, Chi-Wei, 2013. "Do real interest rates converge across East Asian countries based on China?," Economic Modelling, Elsevier, Elsevier, vol. 31(C), pages 467-473.
  3. Chan, Tze-Haw & Baharumshah, Ahmad Zubaidi, 2012. "Financial Integration between China and Asia Pacific Trading Partners: Parities Evidence from the First- and Second-generation Panel Tests," MPRA Paper 37801, University Library of Munich, Germany.
  4. Chan, Tze-Haw, 2012. "Assessing the international parity conditions and transmission mechanism for Malaysia-China," MPRA Paper 38930, University Library of Munich, Germany.
  5. Baharumshah, Ahmad Zubaidi & Soon, Siew-Voon & Boršič, Darja, 2013. "Real interest parity in Central and Eastern European countries: Evidence on integration into EU and the US markets," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 25(C), pages 163-180.
  6. Claudiu Tiberiu Albulescu & Dominique Pepin & Aviral Kumar Tiwari, 2014. "A re-examination of real interest parity in CEECs using old and new generations of panel unit root tests," Papers 1403.3627, arXiv.org.
  7. Liu, Lin & Chang, Hsu-Ling & Su, Chi-Wei & Jiang, Chun, 2013. "Real interest rate parity in East Asian countries based on China with flexible Fourier stationary test," Japan and the World Economy, Elsevier, Elsevier, vol. 25, pages 52-58.

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