Real Interest Rate Equalisation: Some Evidence from East Asian Economies

Abstract

There has been on-going interest in testing the real interest rate equalisation (RIE) proposition in the International Finance literature. Previous studies produce mixed results for the RIE proposition. This paper examines empirically the linkage of real interest rates of the East Asian economies using the cointegration regression technique. We find that there was an increase in the financial linkages in the East Asia during the 1990s, which is consistent with previous studies, and that the real interest rates in East Asia are cointegrated leaving the suspicion that there may be only one common stochastic trend driving them., although the RIE hypothesis is rejected. However, unlike previous studies, the financial linkages in major Asian economies are found to be weaker than among all the East Asian economies.