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

  • Menzie D. Chinn
  • Jeffrey A. Frankel

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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Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 95-02.

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Date of creation: 1995
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Publication status: Published in Journal of International Money and Finance, December 1995, v. 14, iss. 6, pp. 801-21
Handle: RePEc:fip:fedfpb:95-02
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  1. Jeffrey A. Frankel, 1992. "Is Japan Creating a Yen Bloc in East Asia and the Pacific?," NBER Working Papers 4050, National Bureau of Economic Research, Inc.
  2. Wei, S.J. & Frankel, J.A., 1992. "Yen Bloc or Dollar Bloc: Exchange Rate Policies of the East Asian Economies," Papers 92-08, University of Birmingham - International Financial Group.
  3. Charles Engel & John H. Rogers, 1995. "How wide is the border?," Research Working Paper 95-09, Federal Reserve Bank of Kansas City.
  4. 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.
  5. Hali J. Edison & Joseph E. Gagnon & William R. Melick, 1994. "Understanding the empirical literature on purchasing power parity: the post-Bretton Woods era," International Finance Discussion Papers 465, Board of Governors of the Federal Reserve System (U.S.).
  6. Jeffrey A. Frankel, 1989. "Quantifying International Capital Mobility in the 1980s," NBER Working Papers 2856, National Bureau of Economic Research, Inc.
  7. 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.
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