Working Paper: NBER ID: w10047
Authors: Yinwong Cheung; Menzie D. Chinn; Eiji Fujii
Abstract: The linkages between the People's Republic of China (PRC) and the other Chinese economies of Hong Kong and Taiwan are assessed, and compared against those with Japan and the US. We first characterize the time series behavior of variables corresponding to three criteria of integration, namely real interest parity, uncovered interest parity, and relative purchasing power parity. There is evidence that these parity conditions tend to hold over longer periods between the PRC and all other economies, although they do not hold instantaneously. In general, the magnitude of the deviations from the parity conditions is shrinking over time. Overall, however, Hong Kong exhibits indications of a more advanced level of integration with the PRC. We also find that evidence is surprisingly positive for integration with the US. We then turn to examining the determinants of the degree of integration. Regression results suggest that the degrees of financial and real integration depend upon the extent of capital controls, foreign direct investment linkages, as well as the magnitude of exchange rate volatility.
Keywords: No keywords provided
JEL Codes: F13; F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital controls (F38) | real interest differentials (E43) |
| foreign direct investment (FDI) (F23) | purchasing power disparities (F31) |
| exchange rate volatility (F31) | uncovered interest parity (F31) |
| historical economic ties and capital flows (N13) | integration levels (PRC and Hong Kong) (P30) |
| capital mobility (F20) | uncovered interest parity (F31) |
| integration process (F15) | historical ties, regulatory frameworks, macroeconomic policies (F55) |