Who drives real interest rates around the Pacific Rim: the US or Japan?

Menzie Chinn · Jeffrey A. Frankel

78 citations0/0 files storedRePEc: Research Papers in Economics

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Abstract

This paper investigates the relative influence of US and Japanese real interest rates in the determination of local Pacific Rim rates, where influence is defined by the presence of common stochastic trends. Furthermore, the degree to which long run real interest parity holds is examined. The cointegration testing methodology of Johansen (1988) is adopted for this analysis, which allows for multiple cointegrating vectors. The results indicate that Hong Kong, Malaysia and Taiwan are linked with both the US and Japan (in terms of cointegration and positive covariation), while only Singapore is solely linked with the US. On the other hand Korea, and perhaps Indonesia and Thailand appear to be more closely linked with Japan. Real interest parity holds for only the following interest rate pairs: US-Singapore, US-Taiwan and Japan-Taiwan.

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References

1995How Wide is the Border?1994Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies 2003QUANTIFYING INTERNATIONAL CAPITAL MOBILITY IN THE 1980s 1993Is Japan Creating a Yen Bloc in East Asia and the Pacific?1997Understanding the empirical literature on purchasing power parity: the post-Bretton Woods era

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