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The relative influence of US and Japan on real interest rates around the Pacific Rim

Author

Listed:
  • Menzie Chinn

    (University of California at Berkeley)

  • Jeffery Frankel

    (University of California at Berkeley)

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. Alternatively, we ask whether real rates are driven by the same shocks. Furthermore, the degree to which real interest parity holds is examined. Rather than searching for instantaneous real interest parity, this study searches for long run interest parity, allowing for a constant due to differing risk attributes and time invariant exchange risk premia. 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 integrated with both the US and Japan (in terms of cointegration and positive covariation), while only Singapore is solely integrated 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.

Suggested Citation

  • Menzie Chinn & Jeffery Frankel, 1995. "The relative influence of US and Japan on real interest rates around the Pacific Rim," International Finance 9508004, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:9508004
    Note: PACRMINT.WP International Finance
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    References listed on IDEAS

    as
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    Cited by:

    1. Zixiong Xie & Shyh-Wei Chen & An-Chi Wu, 2023. "Real interest rate parity in the Pacific Rim countries: new empirical evidence," Empirical Economics, Springer, vol. 64(3), pages 1471-1515, March.
    2. Chan Tze Haw & Khong Wye Leong Roy & Zubaidi Baharumshah, 2003. "Dynamic Financial Linkages of Japan And Asean Economies: An Application of Real Interest Parity," Capital Markets Review, Malaysian Finance Association, vol. 11(1&2), pages 23-40.
    3. Sanjay Kumar Rout & Hrushikesh Mallick, 2020. "Transmission of International Financial Shocks: A Cross Country Analysis," Asian Development Policy Review, Asian Economic and Social Society, vol. 8(4), pages 236-259, December.

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    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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