IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Real interest rate parity in East Asian countries based on China with flexible Fourier stationary test

  • Liu, Lin
  • Chang, Hsu-Ling
  • Su, Chi-Wei
  • Jiang, Chun
Registered author(s):

    This study applies stationary test with a flexible Fourier function proposed by Enders and Lee (2012) to test the validity of long-run real interest rate parity (RIRP) to assess the non-stationary properties of the real interest rate convergence relative to China for ten East Asian countries. We find that our approximation has higher power to detect U-shaped breaks and smooth breaks than linear method if the true data generating process of interest rate convergence is in fact a stationary non-liner process. We examine the validity of RIRP from the non-linear point of view and provide robust evidence clearly indicate that RIRP holds true for ten East Asian countries. It implies that the choices and effectiveness of the monetary and fiscal policies in the East Asian economies will be highly influenced external factors originating from China. Also, our findings point out their real interest rate convergence relative to China is mean reversion towards RIRP equilibrium values in a non-linear way.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/pii/S0922142513000042
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Japan and the World Economy.

    Volume (Year): 25-26 (2013)
    Issue (Month): ()
    Pages: 52-58

    as
    in new window

    Handle: RePEc:eee:japwor:v:25-26:y:2013:i::p:52-58
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505557

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. FERREIRA Alex Luiz & LEON-LEDESMA Miguel A., . "Does the Real Interest Parity Hypothesis Hold? Evidence for Developed and Emerging Markets," EcoMod2003 330700053, EcoMod.
    2. Bruno Merlevede & Joseph Plasmans & Bas van Aarle, 2003. "A Small Macroeconomic Model of the EU-Accession Countries," Open Economies Review, Springer, vol. 14(3), pages 221-250, July.
    3. 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.
    4. David G. McMillan, 2004. "Non-Linear Error Correction: Evidence for UK Interest Rates," Manchester School, University of Manchester, vol. 72(5), pages 626-640, 09.
    5. Guonan Ma & Robert McCauley, 2010. "The evolving renminbi regime and implications for Asian currency stability," BIS Working Papers 321, Bank for International Settlements.
    6. Maurice Obstfeld & Alan M. Taylor, 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," NBER Working Papers 6053, National Bureau of Economic Research, Inc.
    7. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
    8. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Universite de Montreal, Departement de sciences economiques.
    9. Rhee, Wooheon & Rich, Robert W., 1995. "Inflation and the asymmetric effects of money on output fluctuations," Journal of Macroeconomics, Elsevier, vol. 17(4), pages 683-702.
    10. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    11. Glick, Reuven & Hutchison, Michael, 2009. "Navigating the trilemma: Capital flows and monetary policy in China," Journal of Asian Economics, Elsevier, vol. 20(3), pages 205-224, May.
    12. Nelson C. Mark & Young-Kyu Moh, 2005. "The real exchange rate and real interest differentials: the role of nonlinearities," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(4), pages 323-335.
    13. Schmidt, Peter & Phillips, C B Peter, 1992. "LM Tests for a Unit Root in the Presence of Deterministic Trends," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 257-87, August.
    14. Mark P. Taylor & Lucio Sarno, 2004. "International real interest rate differentials, purchasing power parity and the behaviour of real exchange rates: the resolution of a conundrum," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(1), pages 15-23.
    15. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
    16. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers.
    17. Ivan Paya & Ioannis A. Venetis & David A. Peel, 2003. "Further Evidence on PPP Adjustment Speeds: the Case of Effective Real Exchange Rates and the EMS," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(4), pages 421-437, 09.
    18. Chortareas, Georgios E. & Kapetanios, George & Shin, Yongcheol, 2002. "Nonlinear mean reversion in real exchange rates," Economics Letters, Elsevier, vol. 77(3), pages 411-417, November.
    19. Joshua Aizenman & Reuven Glick, 2008. "Sterilization, Monetary Policy, and Global Financial Integration," NBER Working Papers 13902, National Bureau of Economic Research, Inc.
    20. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
    21. John Greenwood, 2008. "The Costs and Implications of PBC Sterilization," Cato Journal, Cato Journal, Cato Institute, vol. 28(2), pages 205-217, Winter.
    22. Baharumshah, Ahmad Zubaidi & Chan, Tze-Haw & Masih, A. Mansur A., 2005. "Financial Integration of East Asian Economies: Evidence from Real Interest Parity," MPRA Paper 2210, University Library of Munich, Germany, revised 2007.
    23. Eichengreen, Barry, 2004. "Chinese Currency Controversies," CEPR Discussion Papers 4375, C.E.P.R. Discussion Papers.
    24. Guonan Ma & Robert N. McCauley, 2007. "Do China's capital controls still bind? Implications for monetary autonomy and capital liberalisation," BIS Working Papers 233, Bank for International Settlements.
    25. Baharumshah, Ahmad Zubaidi & Haw, Chan Tze & Fountas, Stilianos, 2005. "A panel study on real interest rate parity in East Asian countries: Pre- and post-liberalization era," Global Finance Journal, Elsevier, vol. 16(1), pages 69-85, August.
    26. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
    27. 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.
    28. Ouyang, Alice Y. & Rajan, Ramkishen S. & Willett, Thomas D., 2010. "China as a reserve sink: The evidence from offset and sterilization coefficients," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 951-972, September.
    29. Ralf Becker & Walter Enders & Junsoo Lee, 2006. "A Stationarity Test in the Presence of an Unknown Number of Smooth Breaks," Journal of Time Series Analysis, Wiley Blackwell, vol. 27(3), pages 381-409, 05.
    30. Razvan Pascalau, 2010. "Unit root tests with smooth breaks: an application to the Nelson-Plosser data set," Applied Economics Letters, Taylor & Francis Journals, vol. 17(6), pages 565-570.
    31. Mitsuhiro Fukao, 1990. "Liberalization of Japan's Foreign Exchange Controls and Structural Changes in the Balance of Payments," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 8(2), pages 101-165, September.
    32. Dimitris K. Christopoulos & Miguel A. León-Ledesma, 2010. "Revisiting The Real Wages-Unemployment Relationship. New Results From Non-Linear Models," Bulletin of Economic Research, Wiley Blackwell, vol. 62(1), pages 79-96, 01.
    33. Guonan Ma & RobertN McCauley, 2008. "Efficacy Of China'S Capital Controls: Evidence From Price And Flow Data," Pacific Economic Review, Wiley Blackwell, vol. 13(1), pages 104-123, 02.
    34. 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.
    35. Amsler, Christine & Lee, Junsoo, 1995. "An LM Test for a Unit Root in the Presence of a Structural Change," Econometric Theory, Cambridge University Press, vol. 11(02), pages 359-368, February.
    36. Walter Enders & Junsoo Lee, 2012. "A Unit Root Test Using a Fourier Series to Approximate Smooth Breaks," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(4), pages 574-599, 08.
    37. Yongzhong Wang, 2010. "Effectiveness of Capital Controls and Sterilizations in China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 18(3), pages 106-124.
    38. Robert J. Sonora & Josip Tica, 2010. "Real Interest Parity in New Europe," EFZG Working Papers Series 1011, Faculty of Economics and Business, University of Zagreb.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:japwor:v:25-26:y:2013:i::p:52-58. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.