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Malaysia--China in the Liberalization Era: Structural Modelling of International Parity Conditions and Transmission Mechanism

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  • Tze-Haw Chan
  • Chee-Wooi Hooy

Abstract

We construct a structural system that jointly examines Purchasing Power and Interest Parity conditions for Malaysia--China during 1996Q1--2010Q4. Structural VARX, VECMX, over-identifying restrictions, bootstrapping and persistent profiles are utilized in the analyses. We find support for interaction between the goods and capital markets of Malaysia--China, when Asia crisis and sub-prime crisis are taken into accounts. The faster pace of adjustment towards price instead of interest equilibrium implies the non-appearance of sequencing problem in economic integration. Nevertheless, it is of concern that maintaining a rigid foreign exchange with major trading partner could be costly with potentially contagious price instability and financial risk.

Suggested Citation

  • Tze-Haw Chan & Chee-Wooi Hooy, 2012. "Malaysia--China in the Liberalization Era: Structural Modelling of International Parity Conditions and Transmission Mechanism," Global Economic Review, Taylor & Francis Journals, vol. 41(3), pages 259-277, September.
  • Handle: RePEc:taf:glecrv:v:41:y:2012:i:3:p:259-277
    DOI: 10.1080/1226508X.2012.709994
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