International Capital Mobility and Financial Integration: The Asia Pacific Perspective
This study is conducted to examine the extent of capital mobility and financial integration in the Asia Pacific region. First, the Feldstein-Horioka approach is adopted to determine the capital mobility among the US, Japan and eight Asia Pacific countries. Second, the Real Interest Parity is empl...
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| Format: | Thesis |
| Language: | English English |
| Published: |
2001
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| Subjects: | |
| Online Access: | http://psasir.upm.edu.my/id/eprint/8263/1/FEP_2001_1_IR.pdf http://psasir.upm.edu.my/id/eprint/8263/ |
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| Summary: | This study is conducted to examine the extent of capital mobility and financial
integration in the Asia Pacific region. First, the Feldstein-Horioka approach is adopted
to determine the capital mobility among the US, Japan and eight Asia Pacific
countries. Second, the Real Interest Parity is employed to examine the financial
integration amongst these countries. To capture the effect of financial liberalisation on
these countries, the sample period is divided into two sub-periods, the pre-(1971:Q 1-
1983:Q4) and the post-liberalisation era (1984:Ql-2000:Q3). All empirical evidences
are demonstrated through the application of cointegration tests, Granger-causality,
Variance Decompositions (VDCs) and Impulse Response Functions (IRFs).
The indications of non-co integrated and inactive of causality chains of saving investment
relationships have provided sufficient evidence for the high capital
mobility for all studied countries (including the United States and Japan) in both long
run and short run. These findings are thus not supporting the argument which claimed
that the saving-investment relationship is only applicable for small open countries.
Hence, the failure of most previous researchers to establish such results may therefore reflect the method used rather than any inherent deficiency in the saving-investment
relationship. Moreover, improper treatment of non-stationarity variables may yield
results that are less favourable to long run relationship between the two aggregates.
Results of real interest parity have indicated the dynamic causal linkages and greater
financial integration amongst Asia Pacific countries during the post-liberalisation era.
Relative active Granger-causal chains and the VDCs results have also demonstrated
that ASEAN-5 are more interdependent among themselves as compared to the whole
region. In addition, Singapore is found statistically endogenous in the multivariate
system during post liberalisation, for both ASEAN-5 and the Asia Pacific-l0 model.
This would imply that Singapore has been a vulnerable (to the world market) but very
competitive and efficient financial centre since 198 0s. Moreover, the results of VDCs
and IRFs have confirmed that the movements of real interest rates in Asia Pacific
countries are mainly driven by both the US and Japan. However, the US market has
much more dominance power than Japan, implying that Japan has not overtaken the
role of US in the Asia Pacific regional financial market.
Increased capital mobility and high regional financial integration have always entailed
with large capital inflows into the developing Asia Pacific countries. Despite the
potential welfare gained, capital inflows are most likely associated with monetary and
price instability, contagion effects and speculative investments. Hence, the capital coping
strategies and capital market restructuring will be the key interest for regional
policy makers. Also, to provide a collective defense mechanism against systemic
failure and monetary instability, this study proposes the Asia Pacific Optimal
Currency Area. |
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