International Parities among China and Her Major Trading Partners in Asia Pacific

Chan, Tze-Haw (2008): International Parities among China and Her Major Trading Partners in Asia Pacific.

Abstract

As China’s role in world economy has steadily grown, her importance to the international trading and finance has also increased apace. A joint investigation of the international parity conditions for China and her thirteen major trading partners in Asia Pacific is thus conducted. Monthly observations and sub-samples within 1986-2007 are being considered to accentuate the effects of institutional changes and financial crisis. Advanced econometric procedures including the heterogeneous panel and endogenous break tests for unit root and correction factor model for half-life estimation are utilized in the analyses. Our findings reveal that first, endogenous and exponential breaks are confirmed for the real exchange and real interest differential series, which mostly occur in 1988, 1993/94 and 1997/98. Second, RIP holds better than PPP, suggesting the greater financial integration than trade integration among APEC-China. The undervalued exchange rate regime may exert some drawbacks against the PPP theorem. Third, both parities tend to hold better in the post-liberalization and post-crisis era, attributed not only to the financial liberalization process among APEC economies, but also to the Chinese trade policy and the regional commitment for the ASEAN+3+2+1 cooperation. Fourth, APEC members have has improved their ability to absorb external shocks as indicated by the shortened half-life reported overtime, especially when the post-crisis era is included.

• Item Type: MPRA Paper
• Language: English
• Keywords: PPP, RIP, Non-linear Endogenous Breaks, Panel Unit Root Tests, Economic Integration
• Subjects: F - International Economics > F1 - Trade > F15 - Economic Integration; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

References

Awad, M.A. and Goodwin, B.K. (1998). Dynamic Linkages among Real Interest Rates in International Capital Market. Journal of International Money and Finance, 17, 881-907.

Baharumshah, A.Z., Chan, T.-H. and Fountas, S. (2005) A Panel Study on Real Interest Rate Parity in East Asian Countries: Pre- and Post-liberalization Era. Global Finance Journal, Vol. 16, 69-85, 2005.

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, Vol. 36(2), 103-119.

Breitung, J. and M. H. Pesaran (2005) Unit Roots and Cointegration in Panels. University of Bonn, unpublished manuscript.

Chan, T.-H., 2001, International capital mobility and financial integration: The Asia Pacific perspective. Master of Science Dissertation. Universiti Putra Malaysia.

Chan, T.-H., Khong, W.L. and Baharumshah, A.Z. (2003) Dynamic Financial Linkages of Japan and ASEAN Economies: an Application of Real Interest Parity. Capital Markets Review, Special Issue, Vol. 11(1&2), 23-40.

Chan, T.-H., Baharumshah, A.Z., and Evan, L. (2007) Real Financial Integration among the East Asian Economies: A SURADF Panel Approach. Capital Markets Review, Vol. 15 (1 & 2), 53-72.

Chinn, M.D. and Frankel, J.A. (1995) Who Drives Real Interest rates Around the Pacific Rim: the USA or Japan. Journal of International Money and Finance 14, 801-821.

Cumby, R. E. and Mishkin, M. S. (1986) The International Linkage of Real Interest Rates: The European-US Connection. Journal of International Money and Finance 5, 5-23.

Cumby, R. E. and Obstfeld, M. (1984) International Interest Rate and Price Level Linkages under Flexible Exchange Rates: A Review of Recent Developments. In J. Bilson and R. Marston (eds.) Exchange rates: Theory and Practice, Chicago, University of Chicago Press.

Edison, H.J. (1985) Purchasing Power Parity: A Quantitative Reassessment of the 1920s Experience. Journal of International Money and Finance, 4, 361–372.

Frankel, J. A. (1986) International Capital Mobility and Crowding Out in the US Economy: Imperfect Integration of Financial Markets or Goods Markets? In R.W. Hafer (ed.), How Open is the US Economy? Lexington: Lexington Books, 33–67.

Frankel, J. and A. MacArthur (1988) Political vs. Currency Premia in International Real Interest Differentials: A Study of Forward Rates for 24 Countries. European Economic Review, 32 1083-1121.

Hakkio, C. S. (1984) A Re-examination of Purchasing Power Parity: A Multi-Country and Multi- Period Study. Journal of International Economics, 17, 265–277.

Holmes, M.J. (2002) Does long-run real interest rate parity hold among EU countries? Some new panel data evidence, Quarterly Review of Economic and Finance, 42, 733-746.

Im, K.S., Pesaran, M.H. and Shin, Y. (2003) Testing for Unit Roots in Heterogeneous Panels, Journal of Econometrics 115, 53-74.

Johansen, S. and Juselius, K. (1990) Maximum Likelihood Estimation and Inference on Cointegration with Applications to Money Demand, Oxford Bulletin of Economics and Statistics, 52: 169-210.

Juselius, K., and MacDonald, R. (2003). International parity relationships between the USA and Japan. Japan and the World Economy, 482, 1-18.

Kirchgassner, G. and Wolters, J. (1993) Does the DM dominate the Euro market? An empirical investigation. Review of Economics and Statistics. 75, 773-778.

Lanne, M., P. Saikkonen and H. Lütkepohl, (2002) Comparison of unit root tests for time series with level shifts. Journal of Time Series Analysis 23, 667-685.

Lanne, M., P. Saikkonen and H. Lütkepohl, (2003) Test procedures for unit roots in time series with level shifts at unknown time. Oxford Bulletin of Economics and Statistics 65, 91-115.

Levin, A., Lin, C. F., and C. Chu (2002) Unit root tests in panel data: asymptotic and finite-sample properties, Journal of Econometrics, 108, pp. 1–24.

Lumsdaine, R.L. and Papell, D.H. (1997) Multiple trend breaks and the unit root hypothesis. Review of Economics and Statistics 79, 212-218.

Mark, N.C. (1990) Real and Nominal Exchange Rates in the Long Run: An Empirical Investigation. Journal of International Economics, 28, 115–36.

Meese, R. A., and K. Rogoff, (1988) Was It Real? The Exchange Rate-Interest Differential Relation over the Modern Floating-Rate Period. Journal of Finance, Vol. 14 (4), 933- 948.

Mishkin, F. S. (1984) Are Real Interest Rates Equal Across Countries? An Empirical Investigation of International Parity Conditions. The Journal of Finance XXXIX, 1345-1357.

Moosa, I. and Bhatti, R.H. (1996) Does Europe have an integrated capital market? Evidence from real interest rate parity test. Applied Economic Letters. 3, 517-520.

O’Connell, P. (1998) The Overvaluation of Purchasing Power Parity. Journal of International Economics 44, 1-19.

Pain, D. and Thomas, R., (1997) Real interest rate linkages; Testing got common trends and cycles. Working Paper No. 65. Bank of England.

Papell, D.H. (1997) Searching for stationarity: Purchasing power parity under the current float, Journal of International Economics, 43, pp. 313-332.

Perron, P. (1989) The great crash, the oils price shock, and the unit root hypothesis. Econometrica, 57, pp. 1361-401.

Phylaktis, K. (1997) Capital Market Integration in the Pacific Basin Region: An Analysis of Real Interest Linkages. Pacific–Basin Finance Journal 5, 195-213.

Phylaktis, K., 1999. Capital market integration in the Pacific Basin region: An impulse response analysis. Journal of International Money and Finance. 18, 267-287.

Rogoff, K. (1996) The purchasing power parity puzzle, Journal of Economic Literature, 34, pp. 647-668.

Rossi, B., 2005. Confidence intervals for half-life deviations from purchasing power parity. Journal of Business and Economic Statistics. (forthcoming).

Saikkonen, P. and Lütkepohl, H. (2002) Testing for a unit root in a time series with a level shift at unknown time. Econometric Theory 18, 313-348.

Sun, L., 2004. Measuring time-varying capital mobility in East Asia, China Economic Review,

Taylor, M.P. and Peel, D. (1998) Nonlinear mean reversion in real exchange rates: Towards a solution to purchasing power parity puzzles. Manuscript, Oxford University.

Taylor, M.P. and Sarno, L. (1998) The behavior of real exchange rates during the post-Bretton Woods period. Journal of International Economics. 46(2), 281-312.

Taylor, A. M. and Taylor, M.P. (2004) The purchasing power parity debate. NBER Working Paper, No. 10607.

Wu, Y. (1996) Are real exchange rates nonstationary? Evidence form a panel-data test, Journal of Money, Credit and Banking, 28, 54-63.

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.