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Who drives real interest rates around the Pacific Rim: the USA or Japan?

  • Chinn, Menzie D
  • Frankel, Jeffrey A

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. Furthermore, the degree to which long run real interest parity holds is examined. 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 linked with both the US and Japan (in terms of cointegration and positive covariation), while only Singapore is solely linked 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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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 14 (1995)
Issue (Month): 6 (December)
Pages: 801-821

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Handle: RePEc:eee:jimfin:v:14:y:1995:i:6:p:801-821
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  1. Jeffrey A. Frankel, 1989. "Quantifying International Capital Mobility in the 1980s," NBER Working Papers 2856, National Bureau of Economic Research, Inc.
  2. 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.
  3. Jeffrey A. Frankel & Shang-Jin Wei, 1992. "Yen bloc or dollar bloc: exchange rate policies of the East Asian economies," Pacific Basin Working Paper Series 93-01, Federal Reserve Bank of San Francisco.
  4. Charles Engel & John H. Rogers, 1995. "How wide is the border?," Research Working Paper 95-09, Federal Reserve Bank of Kansas City.
  5. 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.
  6. Jeffrey A. Frankel, 1993. "Is Japan Creating a Yen Bloc in East Asia and the Pacific?," NBER Chapters, in: Regionalism and Rivalry: Japan and the United States in Pacific Asia, pages 53-88 National Bureau of Economic Research, Inc.
  7. Edison, Hali J. & Gagnon, Joseph E. & Melick, William R., 1997. "Understanding the empirical literature on purchasing power parity: the post-Bretton Woods era," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 1-17, February.
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