Abstract
This article aims at testing real interest parity (RIP) by using nonlinear unit root tests. The results from Kapetanios et al. (Citation2003) demonstrated that the adjustment of ASEAN-5 real interest rates towards real interest rates in Japan and the US follows a nonlinear (stationary) process. Overall, the evidence is in favour of RIP.
Acknowledgements
Partial financial support from Ministry of Higher Education for the Fundamental Research Program [Grant No. 06-02-03-004] is gratefully acknowledged.
Notes
1During the past two decades, financial institutions and markets have undergone major transformations. These include structural changes in markets for financial services, improved communications, and production technology, and increasing interdependence and integration of financial and economic systems.
2Chinn and Frankel (Citation1995) concluded that, with few exceptions, RIP does not hold for Pacific Rim rates.
3From the perspective of PPP, the evidence provided by Taylor et al. (Citation2001) based on nonlinear impulse response functions shows that whilst the speed of adjustment for small shocks around equilibrium is highly persistent, larger shocks mean revert much faster than those reported for linear models.
4 Malaysia imposed reform package based on capital controls and fixed exchange rate in September 1999. The amount of portfolio trapped in the country was estimated to be over US $ 14 billion (BNM, Citation1999). There is no evidence to suggest that other types of foreign capital (particularly (foreign direct investment)) have been adversely affected by the capital controls. To check for the robustness of our results due to capital controls, we dropped that data during the post-1999 period for Malaysia. The test results (not reported) also failed to reject the null.