Chan, Tze-Haw (2011): A structural modeling of exchange rate, prices and interest rates between Malaysia-China in the liberalization era.
Download (180kB) | Preview
This study constructs a structural system that allows for possible interactions between the goods and capital markets for Malaysia vis-à-vis China in the liberalization era (1994: Jan to 2011: June). It encompasses the joint hypothesis of Purchasing Power (PPP) and Interest Rate Parity (IRP) conditions in the presence of I(1) exogenous variables. Advanced econometric procedures including the structural VARX, VECX*, over-identifying restrictions, bootstrapping, persistent profiles and generalized variance decomposition are utilized in the analyses. The finding upholds support for both PPP and IRP, when exchange rate regime and structural breaks of Asia crisis and subprime crisis are taken into accounts. Despite the direct imported inflation, exchange rate also plays a significant role in the price transmission mechanism. And, Malaysian maintains the relative monetary autonomy against China in short run, but the price channel will affect the extent of IRP condition. Lastly, the faster pace of adjustment towards price instead of interest rate equilibrium implies the nonappearance of sequencing problem in market integration. Putting together, our model contributes as an early warning system for Malaysia’s economic defense against global shocks.
|Item Type:||MPRA Paper|
|Original Title:||A structural modeling of exchange rate, prices and interest rates between Malaysia-China in the liberalization era|
|Keywords:||International Parity Conditions; Market Integration; Price Transmission Mechanism; Structural VARX; Bootstrapping|
|Subjects:||C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F42 - International Policy Coordination and Transmission
F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration
|Depositing User:||Tze-Haw Chan|
|Date Deposited:||23. Aug 2011 09:49|
|Last Modified:||13. Feb 2013 12:22|
Affandi, Y. (2007). A Small Monetary System for Indonesia: A Long Run Structural Approach. Unpublished Ph.D. Thesis, University of Cambridge.
Alper, C. E., Ardic, O. P. and Fendoglu, S. (2009) The Economics of the uncovered interest parity condition for emerging markets. Journal of Economic Surveys, 23(1), 115-138.
Assenmacher-Wesche, K. and Pesaran, M. H. (2009). A VECX* model of the Swiss economy. Economic Studies, 2009-6, Swiss National Bank.
Baharumshah, A.Z., Aggarwal, R. and Chan, T.-H. (2007) East Asian Real Exchange Rates and PPP: New Evidence from Panel-data Tests. Global Economic Review, 36(2), 103-119.
Baharumshah, A.Z., Chan, T.-H. and Fountas, S. 2008. Re-examining purchasing power parity for East-Asian currencies: 1976-2002. Applied Financial Economics, 18(1), 75-85.
Caporale, G. M., Kalyvitis, and S., Pittis, N. (1995) Testing for PPP and UIP in a FIML framework: some evidence for Germany and Japan, D.P. no. 30-95, Centre for Economic Forecasting, London Business School, London, UK
Cavoli, T., R. Rajan, S. and Siregar, R. (2004) A survey of financial integration in East Asia: how far? How much further to go? CIES Discussion Paper No. 0401, University of Adelaide, Australia.
Chan, T.-H. and C. W. Hooy (2011) Malaysia-China Trade and Macroeconomic Linkages in the Globalization Era: A VECX* Modeling. Leverhulme Centre for Research on Globalisation and Economic Policy (GEP), International Conference on Globalisation Trends and Cycles: The Asian Experience. University of Nottingham. 12th -13th January.
Chan, T.-H., Chong, L. L. and C. W. Hooy (2011) Japan-US Real Exchange Rate Behavior: Evidence from Linear and Non-linear Endogenous Break(s) Tests. Asian Academy of Management Journal of Accounting and Finance (forthcoming)
Chang, Y., J. Y. Park, and K. Song (2006). Bootstrapping cointegrating regressions. Journal of Econometrics, 133, 703–739.
Cheung, Y.-W., Chinn, M. D. and Fujii, E. (2003) China, Hong Kong and Taiwan: a quantitative assessment of real and financial integration. China Economic Review, 1(3), 281-303.
Corsetti, G., Pesenti, P. and Roubini, N. (1999). What caused the Asian currency and financial crisis? Japan and the World Economy, 11(3), 305-373, October.
Coudert, V. and Couharde, C. (2007) Real equilibrium exchange rate in China: is the renminbi undervalued? Journal of Asian Economics, 18(4), 568-594. Eichengreen, B. J. (2006) On the sequencing of regional integration: General considerations and an application to Asia, The North American Journal of Economics and Finance, 17(3), 329-334.
Finke, M. and Rahn, J. (2005) Just how undervalued is the Chinese renminbi? World Economy, 28, 465-631.
Garratt, A., K. Lee, M. H. Pesaran, and Y. Shin (2003) A Long Run Structural Macro-econometric Model of the UK. Economic Journal, 113, 412-455.
Garratt, A., Lee, K., Pesaran, M. H. and Shin, Y. (2006) Global and national macroeconometric modelling: a long run structural approach. Oxford University Press, Oxford.
Gregory, R. P. and Shelley, G. (2011) Purchasing power parity and the Chinese yuan, Economics Bulletin, 31(2), 1247-1255.
Johansen, S. and Juselius, K. (1992) Testing Structural Hypotheses in a Multivariate Cointegration Analysis of the PPP and the UIP for UK. Journal of Econometrics, 53, 211 -244.
Juselius, K. (1995). Do purchasing power parity and uncovered interest rate parity hold in the long run? An example of likelihood inference in a multivariate time-series model. Journal of Econometrics, 69, 211-240.
Juselius, K. and MacDonald, R. (2004). International parity relationships between the USA and Japan. Japan and the World Economy, 16, 17-34.
Kargbo, J. M. (2009) Financial integration and parity reversion in real exchange rates of emerging markets. Applied Economics Letters, 16(1), 29 - 33
Makin, J. H. (1997), Two New Paradigms. American Enterprise Institute, (October).
Mantalos, P. and G. Shukur (1998). Size and power of the error correction model cointegration test. A bootstrap approach. Oxford Bulletin of Economics and Statistics, 60, 249–255.
McKibbin, W. J. and W. T. Woo (2003) The Consequences of China's WTO Accession for Its Neighbors. Asian Economic Papers, MIT Press, 2(2), 1-38.
Özmen, E. and Gökcan, A. (2004) Deviations from PPP and UIP in a financially open economy: the Turkish evidence. Applied Financial Economics, 14(11), 779-784.
Pesaran, M. H. and Y. Shin (1996) Cointegration and Speed of Convergence to Equilibrium, Journal of Econometrics, 71, 117-143.
Pesaran, M. H., Shin, Y., and Smith, R. J. (2000) Structural analysis of vector error correction models with exogenous I(1) variables. Journal of Econometrics, 97, 293-343.
Pomfret, R. (2005) Sequencing trade and monetary integration: issues and application to Asia. Journal of Asian Economics, 16(1), 105-124.
Rogoff, K. (1996) The purchasing power parity puzzle. Journal of Economic Literature, 34, 647-668.
Sjoo, B. (1995) Foreign transmission effects in Sweden: do PPP and UIP hold in the long run? Advances in International Banking and Finance, 1, 129– 149.
The Economist (various issues), Big Mac index, available online http://www.economist.com/node/17257797?story_id=17257797&CFID=163214234&CFTOKEN=64541760.
Yazgan, M. Ege (2003) The purchasing power parity hypothesis for a high inflation country: a reexamination of the case of Turkey. Applied Economics Letters, 10(3), 143-147.
Zivot, E. and Andrews, D. (1992) Further evidence on the great crash, the oil price shock, and the unit root hypothesis. Journal of Business and Economic Statistics, 10, 251-270.