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Real Interest Rate Equalisation: Some Evidence from East Asian Economi es

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  • Ji, Philip Inyeob
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    Abstract

    There has been on-going interest in testing the real interest rate equalisation (RIE) proposition in the International Finance literature. Previous studies produce mixed results for the RIE proposition. This paper examines empirically the linkage of real interest rates of the East Asian economies using the cointegration regression technique. We find that there was an increase in the financial linkages in the East Asia during the 1990s, which is consistent with previous studies, and that the real interest rates in East Asia are cointegrated leaving the suspicion that there may be only one common stochastic trend driving them., although the RIE hypothesis is rejected. However, unlike previous studies, the financial linkages in major Asian economies are found to be weaker than among all the East Asian economies.

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    File URL: http://hdl.handle.net/2123/7654
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    Bibliographic Info

    Paper provided by University of Sydney, School of Economics in its series Working Papers with number 8.

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    Date of creation: Nov 2003
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    Handle: RePEc:syd:wpaper:2123/7654

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    Postal: Sydney, NSW 2006
    Phone: 61 +2 9351 5055
    Fax: 61 +2 9351 4341
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    Web page: http://sydney.edu.au/arts/economics
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    Keywords: Financial integration; Real interest rate equalization; Cointegration;

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    1. Cumby, Robert E. & Mishkin, Frederic S., 1986. "The international linkage of real interest rates: The European-US connection," Journal of International Money and Finance, Elsevier, vol. 5(1), pages 5-23, March.
    2. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, Octomber.
    3. Menzie D. Chinn & Jeffrey A. Frankel, 1995. "Who drives real interest rates around the Pacific Rim: the US or Japan?," Pacific Basin Working Paper Series 95-02, Federal Reserve Bank of San Francisco.
    4. Hutchison, Michael M. & Singh, Nirvikar, 1997. "Equilibrium Real Interest Rate Linkages: The United States and Japan," Journal of the Japanese and International Economies, Elsevier, vol. 11(2), pages 208-227, June.
    5. Lawrence G. Goldberg & James R. Lothian & John Okunev, 2003. "Has International Financial Integration Increased?," International Finance 0311004, EconWPA.
    6. Joaquin Pi-Anguita, 1999. "A cointegration approach to capital mobility: Evidence for Belgium," Atlantic Economic Journal, International Atlantic Economic Society, vol. 27(1), pages 53-58, March.
    7. Goodwin, Barry K. & Grennes, Thomas J., 1994. "Real interest rate equalization and the integration of international financial markets," Journal of International Money and Finance, Elsevier, vol. 13(1), pages 107-124, February.
    8. Mark, Nelson C., 1985. "Some evidence on the international inequality of real interest rates," Journal of International Money and Finance, Elsevier, vol. 4(2), pages 189-208, June.
    9. Anoruo, Emmanuel & Ramchander, Sanjay & Thiewes, Harold F., 2002. "International linkage of interest rates: Evidence from the emerging economies of Asia," Global Finance Journal, Elsevier, vol. 13(2), pages 217-235.
    10. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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