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Uncovered interest parity and monetary integration in East Asian countries based on China

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  • Hsu-Ling Chang
  • Chi Wei Su

Abstract

This study applies a nonlinear threshold unit-root test to investigate the nonstationary properties of the uncovered interest parity (UIP) with risk premium for eight East Asian countries relative to China. We find that the nonlinear threshold unit-root test has greater power than the linear method, if the true data generating process of risk premium convergence is a stationary nonlinear process. We examine the validity of UIP from the nonlinear point of view and provide robust evidence that clearly indicates that UIP holds true for five countries based on China. Our findings highlight that capital mobility, exchange rate market efficiency and monetary integration are nonlinear in these East Asian countries.

Suggested Citation

  • Hsu-Ling Chang & Chi Wei Su, 2015. "Uncovered interest parity and monetary integration in East Asian countries based on China," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 24(4), pages 451-464, June.
    • Handle: RePEc:taf:jitecd:v:24:y:2015:i:4:p:451-464
    DOI: 10.1080/09638199.2014.920402
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    1. Frankel, Jeffrey & Poonawala, Jumana, 2010. "The forward market in emerging currencies: Less biased than in major currencies," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 585-598, April.
    2. Robert J. Sonora & Josip Tica, 2010. "Real Interest Parity in New Europe," EFZG Working Papers Series 1011, Faculty of Economics and Business, University of Zagreb.
    3. Guonan Ma & Robert N. McCauley, 2007. "Do China's capital controls still bind? Implications for monetary autonomy and capital liberalisation," BIS Working Papers 233, Bank for International Settlements.
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    Cited by:

    1. Öge Güney Pelin, 2018. "Uncovered Interest Rate Parity: The Turkish Evidence," Review of Middle East Economics and Finance, De Gruyter, vol. 14(2), pages 1-11, August.

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