Financial Integration of East Asian Economies: Evidence from Real Interest Parity

Baharumshah, Ahmad Zubaidi and Chan, Tze-Haw and Masih, A. Mansur A. and Lau, Evan (2007): Financial Integration of East Asian Economies: Evidence from Real Interest Parity.

Abstract

In this paper, we investigate the financial linkages between the East Asian economies with Japan and the US using the real interest rate parity (RIP) condition. We test for long-run RIP using an array of panel unit root tests, including a recent technique developed by Breuer et al. (2002). This study offers two important results: first, we found strong (robust) evidence that the parity condition holds in all the Asian countries, except for China. For China, there is no evidence of RIP when Japan is used as based country. Real interest differential between China and the US exhibits a tendency towards stationary equilibrium over the period 1987-2006. Second, the analysis drawn on half-life suggests that the US-Asian link has been getting stronger than the Japan-Asian one in the post-liberalization era.

• Item Type: MPRA Paper
• Institution: Universiti Putra Malaysia
• Language: English
• Keywords: RIP; panel unit root tests; half-lives
• Subjects: F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F0 - General > F02 - International Economic Order and Integration; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

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