Non-linear aspects of financial integration: An analysis of the real interest rate parity for Southeast Asian economies

<p>This study assesses the extent to which selected economies in Southeast Asia are financially integrated among themselves and internationally, and investigates whether financial integration in the region increased following the deregulation of their markets over the 1980's and early 1990's. The analysis is carried out by examining the relationship between ex post real interest rates over 1970-2005. Following the work of Meese and Rogoff (1988), countries are considered financially integrated based on the stationarity property of their real interest rate differentials. Conclusions are drawn from a confirmatory analysis, which contrasts results from unit root tests, with and without structural breaks, with results from Bai and Perron (1998) technique. Changes in the level of financial integration are evaluated through a modified Band-Threshold Autoregressive model. In this framework, constraints to financial integration determine the degree of interdependence between real interest rates. If the deregulation process was effective in promoting a greater financial integration, this interdependence is expected to increase over time. A number of interesting results is obtained. First, the majority of the real interest rate differentials for Southeast Asia have structural breaks. Estimates from Bai and Perron (1998) procedure indicates that these breaks occurred mainly over the 1980's, when Southeast Asian economies enacted several reforms in their financial markets, at the beginning of the Asian crisis and in the following two years after this crisis. Second, unit root tests provide supportive evidence that, except for Thailand, Southeast Asian economies are financially integrated at both regional and international levels. The possible reason for this finding is that Thailand started liberalizing its financial markets the latest and that its financial market controls are relatively stronger. Finally, this study finds that the degree of financial integration in Southeast Asia has been recently increased. Nevertheless, Southeast Asian economies have become more financially integrated with Japan and United States than with other members of Southeast Asia. Such result suggests that the extensive process of financial liberalization that took place in the region over the 1980's have biased the course of financial integration towards international rather than regional markets.</p>

Name thesis:degree_name

Doctor of Philosophy

Level thesis:degree_level

Dissertation

Year

2006

Author dc:creator

• Linhares, Fabricio

Contributors dc:contributor

• Evangelos Simos

• Economics
• General

Repository record dc:identifier

https://scholars.unh.edu/dissertation/322

OAI identifier oai:identifier

oai:scholars.unh.edu:dissertation-1321