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The relative influence of US and Japan on real interest rates around the Pacific Rim

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  • Menzie Chinn

    (University of California at Berkeley)

  • Jeffery Frankel

    (University of California at Berkeley)

Abstract

This paper investigates the relative influence of US and Japanese real interest rates in the determination of local Pacific Rim rates, where influence is defined by the presence of common stochastic trends. Alternatively, we ask whether real rates are driven by the same shocks. Furthermore, the degree to which real interest parity holds is examined. Rather than searching for instantaneous real interest parity, this study searches for long run interest parity, allowing for a constant due to differing risk attributes and time invariant exchange risk premia. The cointegration testing methodology of Johansen (1988) is adopted for this analysis, which allows for multiple cointegrating vectors. The results indicate that Hong Kong, Malaysia and Taiwan are integrated with both the US and Japan (in terms of cointegration and positive covariation), while only Singapore is solely integrated with the US. On the other hand Korea, and perhaps Indonesia and Thailand appear to be more closely linked with Japan. Real interest parity holds for only the following interest rate pairs: US-Singapore, US- Taiwan and Japan-Taiwan.

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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 9508004.

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Date of creation: 28 Aug 1995
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Handle: RePEc:wpa:wuwpif:9508004

Note: PACRMINT.WP International Finance
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  1. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-25, December.
  2. Frankel, Jeffrey A., 1989. "Quantifying International Capital Mobility in the 1980s," Department of Economics, Working Paper Series qt4fw7c7bh, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Michael M. Hutchison & Nirvikar Singh, 1993. "Long-term international capital mobility: new evidence from equilibrium real interest rate linkages," Pacific Basin Working Paper Series 93-06, Federal Reserve Bank of San Francisco.
  4. Godfrey, Leslie G, 1978. "Testing against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, vol. 46(6), pages 1293-1301, November.
  5. Richard C. Marston, 1992. "Determinants of Shrt-Term Real Interest Differentials Between Japan and the United States," NBER Working Papers 4167, National Bureau of Economic Research, Inc.
  6. Maurice Obstfeld., 1993. "Model Trending Real Exchange Rates," Center for International and Development Economics Research (CIDER) Working Papers C93-011, University of California at Berkeley.
  7. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
  8. Mitsuhiro Fukao & Masaharu Hanazaki, 1986. "Internationalisation of Financial Markets: Some Implications for Macroeconomic Policy and for the Allocation of Capital," OECD Economics Department Working Papers 37, OECD Publishing.
  9. Gagnon, Joseph E & Unferth, Mark D, 1995. "Is there a world real interest rate?," Journal of International Money and Finance, Elsevier, vol. 14(6), pages 845-855, December.
  10. Reuven Glick, 1987. "Interest rate linkages in the Pacific Basin," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 31-42.
  11. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  12. Glick, Reuven & Hutchison, Michael, 1990. "Financial liberalization in the Pacific Basin: Implications for real interest rate linkages," Journal of the Japanese and International Economies, Elsevier, vol. 4(1), pages 36-48, March.
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Cited by:
  1. Chan, Tze-Haw & Khong, Wye Leong Roy & Baharumshah, Ahmad Zubaidi, 2003. "Dynamic Financial Linkages of Japan and ASEAN Economies: An Application of Real Interest Parity," MPRA Paper 2209, University Library of Munich, Germany, revised 2003.

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