A panel study on real interest rate parity in East Asian countries: pre- and post-liberalization era

• Main Authors: Baharumshah, Ahmad Zubaidi, Chan, Tze Haw, Fountas, Stilianos
• Format: Article
• Language: English
• Published: Elsevier 2005
• Online Access: http://psasir.upm.edu.my/id/eprint/40297/1/A%20panel%20study%20on%20real%20interest%20rate%20parity%20in%20East%20Asian%20countries%20pre-%20and%20post-liberalization%20era.pdf; http://psasir.upm.edu.my/id/eprint/40297/; http://www.sciencedirect.com/science/article/pii/S1044028305000177

This study examines the mean reverting behavior of real interest differentials in ten Asian economies using Japan as the base country. We obtain a number of interesting results: first, the conventional ADF test fails to support Real Interest Parity (RIP) for at least half of the countries, even for the post-financial liberalization period. Second, the evidence based on panel unit root tests demonstrates that real interest rate differentials exhibit mean reverting behavior and are characterized by long-memory dynamics. Finally, the evidence suggests that deviations from RIP have a half-life of approximately 6 to 7 months.