A panel study on real interest rate parity in East Asian countries: Pre- and post-liberalization era Ahmad Zubaidi Baharumshah a, * , Chan Tze Haw a,b , Stilianos Fountas c a Department of Economics, Faculty of Economics and Management, University of Putra Malaysia, Malaysia b Medical Education and Research Unit, International Medical University, Malaysia c Department of Economics, University of Macedonia, Greece Received 3 April 2005; received in revised form 12 April 2005; accepted 2 May 2005 Available online 31 May 2005 Abstract This study examines the mean reverting behavior of real interest differentials in ten Asian economies using Japan as the base country. We obtain a number of interesting results: first, the conventional ADF test fails to support Real Interest Parity (RIP) for at least half of the countries, even for the post-financial liberalization period. Second, the evidence based on panel unit root tests demonstrates that real interest rate differentials exhibit mean reverting behavior and are characterized by long-memory dynamics. Finally, the evidence suggests that deviations from RIP have a half-life of approximately 6 to 7 months. D 2005 Elsevier Inc. All rights reserved. JEL classification: F31; F32; F36 Keywords: Real interest differentials; Mean-reversion; Half-life; Panel unit root tests 1. Introduction The last twenty years have witnessed a massive increase in the degree of international financial integration in both industrialized and developing countries 1044-0283/$ - see front matter D 2005 Elsevier Inc. All rights reserved. doi:10.1016/j.gfj.2005.05.005 * Corresponding author. Tel.: +60 38946 7744/7625; fax: +60 38948 6188. E-mail addresses: zubaidi@econ.upm.edu.my (A.Z. Baharumshah), chanth@imu.edu.my (C.T. Haw), sfountas@uom.gr (S. Fountas). Global Finance Journal 16 (2005) 69 – 85