WHO DRIVES REAL INTEREST-RATES AROUND THE PACIFIC RIM - THE USA OR JAPAN

This paper investigates the relative influence of US and Japanese real interest rates in the determination of local Pacific Rim rates, where influence is defined by the presence of common stochastic trends. Fur thermore, the degree to which long-run real interest parity holds is e xamined. The cointegration testing methodology of Johansen (1988) is a dopted for this analysis, which allows for multiple cointegrating vect ors. The results indicate that Hong Kong, Malaysia and Taiwan are link ed with both the USA and Japan (in terms of cointegration and positive covariation), while only Singapore is solely linked with the USA. On the other hand Korea, and perhaps Indonesia and Thailand appear to be more closely linked with Japan. Real interest parity holds for only th e following interest rate pairs: USA-Singapore, USA-Taiwan and Japan-T aiwan.