Abstract
This paper examines the linkage of real interest rates of a group of Pacific-Basin countries with a focus on East Asia. We consider monthly real interest rates of US, Japan, Korea, Singapore, and Thailand from 1980 to 2006. The impulse response analysis and half-life estimation are conducted in a multivariate setting, adopting the bias-corrected bootstrap as a means of statistical inference. It is found that the degree of capital market integration has increased after the Asian financial crisis in 1997. The overall evidence suggests that the crisis has substantially changed the nature of the short run interactions among the real interest rates. Before the crisis, both the US and Japanese capital markets dominated the region. After the crisis, the dominance of the Japanese market has completely disappeared, while the US market remains as a sole dominant player and the Korean market has become more influential.
Highlights
There is growing evidence to suggest that international capital markets have become increasingly integrated
In view of the points listed above, Goodwin and Grennes (1994) argued that the existence of a long run equilibrium among real interest rates should have strong implications for interest parity and efficiently integrated markets. They suggested the use of cointegration analysis (Engle and Granger; 1987; and Johansen; 1988), since it provides a suitable framework to test and estimate long run equilibrium relationships
We have conducted the generalized impulse response analysis of Pesaran and Shin (1998), which is invariant to the ordering of the variables
Summary
There is growing evidence to suggest that international capital markets have become increasingly integrated Central to this issue is the real interest rate equalization hypothesis, and testing its empirical validity has been a subject of particular interest. In view of the points listed above, Goodwin and Grennes (1994) argued that the existence of a long run equilibrium among real interest rates should have strong implications for interest parity and efficiently integrated markets. They suggested the use of cointegration analysis (Engle and Granger; 1987; and Johansen; 1988), since it provides a suitable framework to test and estimate long run equilibrium relationships. Subsequent studies by Chinn and Frankel (1995), Hutchison and Singh (1997), Phylaktis (1997, 1999), and Yamada (2002a, 2002b) have adopted cointegration analysis and identified long run relationships among real interest rates
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