Is China Integrated With Her Major Trading Partners: Evidence on Financial and Real Integration

Abstract

Applying the new panel unit root test developed in this paper we can overcome the pitfalls of old-fashioned panel unit root tests making it possible for researchers testing individual series for a unit root while taking contemporaneous cross-sectional dependence and structural break into account. The proposed test was used to investigate the status of financial and real integration of China Japan UK the European Union and the United States based on the empirical validity of real interest parity uncovered interest parity and relative purchasing power parity. We found strong evidence in favor of those parity conditions and hence concluded that financial and real integration between China and the other four countries was well established using the new developed panel unit root test while the traditional tests (either univariate or panel) fail to do so.