EXAMINING THE UNDERLYING PARITY CONDITIONS SUFFICIENT FOR REAL INTEREST PARITY FOR ASIAN COUNTRIES

This paper examines the underlying parity conditions upon which real interest parity (RIP) is predicted for some Asian countries relative to the U.S. and Japan over a period (1978–2009) containing significant changes using the multivariate cointegration procedure of Johansen et al. (2000) that allows for up to two pre-determined breaks. Each parity condition is examined to determine which is responsible for the rejection of RIP. The results suggest that the Fisher hypothesis is the least likely to violate RIP, whereas uncovered interest parity (UIP) appears to be most commonly violated. Stability tests suggest that the RIP relationship has been stable in most cases and that the impact of the Asian crisis and the Plaza Accord appears to be transitory, and that the RIP relationships have strengthened in the aftermath of the 1997–1998 Asian crisis.

The Integration of Financial Markets in GCC Countries

The real interest parity (RIP) condition states that the interest rate differential between two economies is equivalent to the differential between the forward exchange rate and the spot exchange rate. This study examines the integration of financial markets in the GCC countries by verifying the validity of RIP in their economies. Using univariate and different panel unit root tests, we find evidence supporting the RIP theory, which indicates that the financial markets in these countries are well integrated and that the adoption of a common currency would be relatively easy. JEL classification: F21; F36; C23 Keywords: Real Interest Parity, GCC Countries, Panel Unit Root Tests, Monetary Union