Evidence on PPP with China along the belt and road using the three-regime TAR cointegration tests

The Chinese Government has proposed the ‘Belt and Road Initiative’ (BRI) in order to increase trade flows and economic prosperity among the Belt and Road (BR) member countries. The BRI may call for enlargement of economic cooperation as manifested by forming an economic or monetary union in the long...

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Bibliographic Details
Published in:Empirical economics 2021-05, Vol.60 (5), p.2391-2405
Main Authors: Woo, Kai-yin, Lee, Shu-kam, Shum, Paul Kwok
Format: Article
Language:English
Subjects:
Arbitrage
Convergence
Cooperation
Econometrics
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Finance
Insurance
International cooperation
International trade
Management
Monetary unions
Policy making
Purchasing power parity
Roads & highways
Statistics for Business
Thresholds
Trade flows
Trading
Transaction costs
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Summary:The Chinese Government has proposed the ‘Belt and Road Initiative’ (BRI) in order to increase trade flows and economic prosperity among the Belt and Road (BR) member countries. The BRI may call for enlargement of economic cooperation as manifested by forming an economic or monetary union in the long term. It is therefore essential to choose a subset of member countries that fulfils the criteria for joining the potential economic or monetary union. The validity of purchasing power parity (PPP) implies well-integrated goods markets and is a pre-condition for further economic convergence. While the presence of transaction costs causes nonlinearities in the adjustment mechanism, our empirical study applies a three-regime threshold autoregressive (TAR) cointegration method for analysis. Our results support the existence of a PPP relationship with China for 12 sampled Asian member countries. Chinese policymakers can prioritize these BR countries for closer economic cooperation. Also, this TAR cointegration method can estimate the unobservable proportional transaction costs from the thresholds. The results reveal BR countries with large thresholds as targets to curtail transaction costs of trading in order to enhance the efficiency in international goods arbitrage and the degree of trade integration along the BR routes.
ISSN:0377-7332
1435-8921
DOI:10.1007/s00181-020-01884-6