Malaysia--China in the Liberalization Era: Structural Modelling of International Parity Conditions and Transmission Mechanism

Tze-Haw Chan () and Chee-Wooi Hooy

Global Economic Review, 2012, vol. 41, issue 3, 259-277

Abstract: We construct a structural system that jointly examines Purchasing Power and Interest Parity conditions for Malaysia--China during 1996Q1--2010Q4. Structural VARX, VECMX, over-identifying restrictions, bootstrapping and persistent profiles are utilized in the analyses. We find support for interaction between the goods and capital markets of Malaysia--China, when Asia crisis and sub-prime crisis are taken into accounts. The faster pace of adjustment towards price instead of interest equilibrium implies the non-appearance of sequencing problem in economic integration. Nevertheless, it is of concern that maintaining a rigid foreign exchange with major trading partner could be costly with potentially contagious price instability and financial risk.

Date: 2012
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DOI: 10.1080/1226508X.2012.709994

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