Monetary convergence in East Asian countries relative to China

This study applies the Sequential Panel Selection Method (SPSM) proposed by Chortareas and Kapetanios (2009) to investigate the non-stationary properties of uncovered interest parity (UIP) with the risk premiums of eight East Asian countries relative to China. SPSM can classify the entire panel of smaller East Asian countries into two groups: one stationary series and one non-stationary series. We clearly identify how many and which series in the panel are stationary processes and provide robust evidence to indicate that UIP holds true for six of the eight East Asian countries included in this analysis. This implies that the choices and effectiveness of monetary and fiscal policies in East Asian economies will be highly influenced by external factors originating in China. Additionally, our findings indicate that capital mobility and exchange market efficiency in these East Asian countries behave in a non-linear way.