The progress of financial liberalisation
in East Asian countries has led to an abundant economic literature, especially
as far as its external aspects are concerned. Without doubt, the main issue hinges
on whether these countries participate in a monetary zone, as this has important
implications for the role of the yen and the dollar in the international monetary
system. Research generally suggests that the dollar is still the dominant currency
in East Asia. The methods used to obtain such results are often based on interest
rate parity tests, with the implicit assumption that the overall monetary stance
of a country may be revealed by a single rate of interest. However, this assumption
can be challenged for countries which have not yet completed internal financial
liberalisation.
The present study uses a two-step method to look at this issue, by first evaluating internal financial integration prior to estimating international links. To begin with, cointegration tests are carried out to estimate the relationship between central bank benchmark rates and other domestic interest rates, deposit or lending rates. Thereafter, the influence of American and Japanese rates on Asian rates is evaluated, using Granger causality tests. The sample studied includes eight countries: Korea, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, Taiwan and Thailand. In order to include any possible recent developments, tests are carried out on recent, weekly data.
Various patterns of behaviour have been identified. For Korea, a clear influence of American interest rate can be found, and this is reflected across all domestic rates. Singapore too is influenced by the American rate, though not the lending rate. Given Hong Kong's currency board, the benchmark rate is very closely tied to the United States; however, in practice surplus reserves allow such a strict currency board constraint to be somewhat moderated, with deposit and lending rates not necessarily following the benchmark rate. In Thailand, the call rate is subject to an American influence, but its fluctuations are not passed on through to other rates. In Indonesia, Malaysia, and the Philippines, no foreign influence could be found on nominal rates.
Although the sample is based on recent data, the tests show that the role of the yen is still very limited, as no country out of eight has its interest rate linked to the Japanese one. The dominant status of the dollar in the region is thus confirmed. Nevertheless, external influences are not necessarily carried over into the whole of the economy. |
Abstract |
