Abstract
Applying the new panel unit root test developed in this paper, we can overcome the pitfalls of old‐fashioned panel unit root tests making it possible for researchers testing individual series for a unit root while taking contemporaneous cross‐sectional dependence and structural break into account. The proposed test was used to investigate the status of financial and real integration of China, Japan, UK, the European Union, and the United States based on the empirical validity of real interest parity, uncovered interest parity, and relative purchasing power parity. We found strong evidence in favor of those parity conditions and hence concluded that financial and real integration between China and the other four countries was well established using the new developed panel unit root test while the traditional tests (either univariate or panel) fail to do so. Santrauka Straipsnyje ieškoma rodymų apie finansinę ir realiąją integraciją tarp Kinijos bei jos tarptautinės prekybos partnerių. Autorių patobulinta ekonometrikos metodo (panel unit root test) versija leidžia ekonomistams atsižvelgti į nagrinėjamų šalių tarp šakinių ryšių bei ekonomikos struktūrų specifika. Finansinei bei realiai integracijai tarp Kinijos ir pagrindiniu jos prekybos partneriu, t. y. Japonijos, Jungtines Karalystes, Europos Sąjungos bei Jungtiniu Amerikos Valstijų, vertinti buvo naudoti tokie kintamieji, kaip nepadengtu palūkanų paritetas, palūkanų normų paritetas bei santykinis perkamosios galios paritetas. Tyrimo rezultatai patvirtino prielaida apie gana didelę minėtų paritetų svarba ir leido konstatuoti, kad Kinija yra gana stipriai finansiškai bei realiai integruota su savo pagrindinėmis prekybos partnerėmis.
Highlights
A vast amount of studies have focused on the effect of trade flow issues after China entered the World Trade Organization (WTO), for example Wang (2003) and Ma (2001), Wei et al (2000), Noland et al (1998), and Fernald et al (1999), among others
The results of those tests are similar to augmented dicky-fuller (ADF) test in concluding that the Uncovered Interest Parity (UIP) differential between China and the US is nonstationary
We developed a new panel unit root test to overcome the pitfalls of the oldfashioned panel unit root tests like that of IPS panel unit root test by making it possible for researchers to test individual series for a unit root while taking contemporaneous cross-sectional dependence and structural break into account
Summary
A vast amount of studies have focused on the effect of trade flow issues after China entered the World Trade Organization (WTO), for example Wang (2003) and Ma (2001), Wei et al (2000), Noland et al (1998), and Fernald et al (1999), among others. Lane and Schmukler (2007) concentrated on the international financial integration of China and India In his senior thesis, Lei (2006) analyzed the real and financial integration between China and Taiwan basing his research on the empirical validity of real interest parity, uncovered interest parity and relative purchasing power parity. Chan et al (2007) investigated the real and financial integration among East Asian economies They incorporated the ASEAN-5, South Korea and mainland China with the US and Japan taken as base countries. Cheung et al (2006) assessed and compared the linkages between China and the other Chinese economies of Hong Kong and Taiwan against the linkages with Japan and the US They characterized the time series behavior of three criteria of integration, namely real interest parity, uncovered interest parity, and relative purchasing power parity
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