Capital Market Integration in the Pacific Basin Region: An Analysis of Real Interest Rate Linkages

IMF Working Papers, December 1, 1995

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Canonical URL: Capital Market Integration in the Pacific Basin Region: An Analysis of Real Interest Rate Linkages

Author: Kate Phylaktis
Date: December 1, 1995
This paper investigates the extent to which financial markets in the Pacific Basin Region have become more integrated by analyzing the comovements of real interest rates.
The paper uses cointegration and error correction models and draws inferences on the degree of capital market integration by looking at the speed of adjustment of real interest rates following a shock.

Analytical tools:
- Cointegration models
- Error correction models
Identification of integration:
- Degree of capital market integration inferred from the speed of adjustment of real interest rates after shocks.

There has been an increase in capital market integration with both U.S. and Japan during the 1980s.
Japan has not overtaken the U.S. in dominating the financial markets of these Pacific Basin countries, except possibly in the case of Malaysia.
Capital market integration is found to be greater in:
- Singapore
- Hong Kong
- Taiwan Province of China
Japan is identified as the least integrated country with the United States.

Countries examined: Japan, Singapore, Hong Kong, Taiwan Province of China, Malaysia, and Korea.
Subjects: Balance of payments, Capital controls, Capital market integration, Economic integration, Financial services, Interest rate parity, Market interest rates, Real interest rates.
Keywords: Asia and Pacific, Capital controls, capital market, Capital market integration, Central Asia, curb market, differential eit, East Asia, integration issue, interest rate, Interest rate parity, Market interest rates, real interest rate, real interest rate differential, real interest rate parity, Real interest rates, WP