Real Financial Integration among the East Asian Economies: A SURADF Panel Approach

Abstract

Abstract: To testify RIP, this study scrutinises the mean-reversion behaviour of bilateral real interest differentials (RIDs) in eight East Asian economies. We incorporated the ASEAN 5. South Korea and China (mainland) with the US and Japan taken as base countries. Four sub-samples within 1976-2004 were considered to accentuate the effects of institutional changes and financial crises. To rectify the deficiency in extant univariate and panel tests, the newly proposed SURADF statistics by Breuer et al. (2002) was utilised. Overall, the findings are in favour of RIP such that RIDs are found mean-reverting (except for China) and with faster adjustment, especially during the post-crisis era. Such outcome is in accord with the enhanced financial integration among the ASEAN-5 and South Korea with their major trading partners, suggesting that further economic cooperation and currency arrangements in the region are bright to preserve potential financial shocks. Conversely, the real financial integration among China-US and China-Japan are not yet empirically recognised notwithstanding the recent surge of capital flows into the mainland.