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

Abstract

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.