DO AFRICAN COUNTRIES MOVE ASYMMETRICALLY TOWARDS PURCHASING POWER PARITY?

This paper investigates the possibility that the adjustment towards long‐run relative purchasing power parity (PPP) is dependent upon the nature of deviations from PPP that are experienced. While existing studies involving developed and less developed countries often find against PPP having employed linear tests of non‐stationarity or non‐cointegration, we employ a new cointegration test, recently advocated by Enders and Siklos and Enders and Dibooglu, that tests for an asymmetric adjustment towards parity with respect to positive and negative deviations of the real exchange rate from its equilibrium value. Using a sample often African economies with data taken from the post‐Bretton Woods floating exchange rate era, long‐run PPP holds in eight of these cases if an explicit distinction is made between positive and negative deviations. Across the sample, we find variation in the type of asymmetry experienced and the roles played by price and nominal exchange rate adjustment.     

New Evidence on Export Price Elasticity from China and Six OECD Countries

This paper provides new evidence on export price elasticities by analyzing the cases of China, France, Germany, Italy, Japan, UK and the USA over the period 1990–2012. Estimates have been made using panel data techniques for non‐stationary data. After demonstrating that long‐run relationships are stable to any structural break, it is found that exports are significantly determined by foreign demand, with long‐run income elasticity significantly higher than unity for China, Japan, Germany, the UK and the USA. Conversely, exports are price inelastic for most of the countries in the sample, in both the long run and the short run. The exception is France, whose export price elasticity is lower (higher) than unity in the short run (long run).     

ESTIMATING EXCHANGE RATE AND BILATERAL TRADE BALANCE RELATIONSHIPS: THE EXPERIENCE OF SUB-SAHARAN AFRICAN COUNTRIES

This paper examines the effects of exchange rate changes on the bilateral trade balance of ten African countries vis‐à‐vis the US using annual data over period 1977‐2002. Both the Johansen and panel cointegration tests find cointegration among the series. The country FMOLS results show that real exchange rate depreciation improves the trade balance in six of ten countries in contrast to Tanzania in which it worsens the trade balance, with no effect found in Ghana, Morocco and Senegal. Foreign real income improves the trade balance in two countries but worsens it in another three. Finally, domestic real income negatively affects the trade balance in four countries but improves it in another three. The three‐panel coefficients are correctly signed and significant at the 1% level.     

PURCHASING POWER PARITY WITH RANK TESTS FOR NONLINEAR COINTEGRATION IN AFRICAN COUNTRIES

This study applies nonlinear cointegration to assess exchange rates with the corresponding relative prices and aggregate price levels for 20 African countries. We find that a nonparametric rank test has higher power than parametric testing procedures; a true data‐generating process of exchange rate is in fact a stationary nonlinear process. We examine the validity of purchasing power parity (PPP) from the nonparametric nonlinear point of view and provide robust evidence that clearly indicates PPP holds true for these countries. Hence, the long‐run African countries exchange rate adjustments are in equilibrium with the relevant fundamentals as suggested by the PPP hypothesis in a nonlinear way.     

Is the Gulf Cooperation Council an Optimum Currency Area?

This article applies the theory of Generalized Purchasing Power Parity (G‐PPP) to assess the potential for an optimum currency area (OCA) for the Gulf Cooperation Council (GCC) countries over the period 1973–2009. Utilizing a multivariate cointegration procedure that allows for up to two predetermined structural breaks, the results suggest that the GCC countries could form an OCA since macroeconomic conditions are in favor of forming an OCA, i.e., real exchange rates share common trends and the parameter stability test indicates that the G‐PPP relationship has been stable for the period analyzed. Moreover, the results suggest that the withdrawal of Oman and/or United Arab Emirates (UAE) from the union has no impact on forming the union. However, based on other OCA criteria, the results suggest that the OCA may be challenged.     

Cointegration and the PPP and the UIP hypotheses: An application to the Spanish integration in the EC

The aim of this paper is to find some empirical evidence on Purchasing Power Parity (PPP) and Uncovered Interest Parity (UIP) in the Spanish case vis à vis the European Community for the period 1980–89. The main contribution of the paper is the aggregation of the variables corresponding to the countries that participate in the exchange rate mechanism of the European Monetary System. The results support the importance of the interest differential as an explanatory variable for the short-term adjustment to the PPP. The results follow from powerful estimation techniques, applied in the framework of a multivariate error-correction model using the maximum-likelihood procedure as developed by Johansen and Juselius (1992).     

The trend behavior of real exchange rates: Evidence from OECD countries

The Trend Behavior of Real Exchange Rates: Evidence from OECD Countries. — This paper examines the validity of purchasing power parity (PPP) under the current float using real effective exchange rates of eleven OECD countries. The author employs a test which allows for a one-time change in the intercept and/or in the slope of the trend function. The timing of the structural break is treated as unknown and is endogenously searched from the data. It is found that for a vast majority of countries, the real exchange rate can be characterized as a stationary process with a broken trend. The paper provides support for PPP in the long run.     

PURCHASING POWER PARITY IN AFRICAN COUNTRIES: FURTHER EVIDENCE FROM FOURIER UNIT ROOT TESTS BASED ON LINEAR AND NONLINEAR MODELS

This paper examines the validity of purchasing power parity hypothesis for 33 African countries using recently developed Fourier unit root tests by Christopoulos and León‐Ledesma that account for the existence of multiple breaks in the real exchange rates. The results support the evidence of the PPP in 20 countries, showing that most of the real exchange rates in the selected countries are characterised by linear or nonlinear stationary around multiple temporary mean changes.     

Causal Relationship between Domestic Savings and Economic Growth: Evidence from Seven African Countries

This paper utilizes cointegration and the vector error‐correction model (VECM) to explore the causal relationship between economic growth and growth rate of domestic savings for Congo, Côte d’Ivoire, Ghana, Kenya, South Africa, and Zambia. Specifically, three analyses were undertaken. First, the time series properties of economic growth and domestic savings were ascertained with the help of the augmented Dickey–Fuller unit root procedure. Second, the long‐run relationship between economic growth and growth rate of domestic savings was examined in the context of the Johansen and Juselius (1990) framework. Finally, a Granger‐causality test was undertaken to determine the direction of causality between economic growth and growth rate of domestic savings. The results indicate one order of integration [I(1)] for each of the series. The results of the cointegration tests suggest that there is a long‐run relationship between economic growth and growth rate of savings. The results from the Granger‐causality tests indicate that contrary to the conventional wisdom, economic growth prima facie causes growth rate of domestic savings for most of the countries under consideration.     

International Capital Mobility in the Short Run and the Long Run: A Daily Data Study for Japan,Singapore and Taiwan*

Using daily data from between 1993 and 2003, covered interest differential and cointegration tests are applied to examine short‐run and long‐run international capital mobility for Japan, Singapore and Taiwan, and, for comparison purposes, the UK. Despite the high short‐run mobility in Japan (Singapore and Taiwan), being slightly (significantly) lower than in the UK, perfect long‐run mobility exists in all three Asian economies, especially when the Asian currency crisis is excluded. Different short‐run and long‐run mobility implies the existence of a response lag in the financial market. As expected, although the impulse response reaches the significant long‐run equilibrium level shortly after the shock in the UK, lagged responses appear in the three Asian economies, particularly in Singapore and Taiwan.     

Asian Currency Crisis and the Generalized PPP: Evidence from the Far East

The present paper investigates the effects of the Asian currency crisis of 1997–1998 on the generalized PPP between several real exchange rates of the Far East countries. Monthly log of real exchange rates of the currencies of Thailand, Malaysia, Indonesia, the Philippines and South Korea vis-à-vis the US dollar and the Japanese yen during 1990–2004 are applied in the investigation. Further tests are conducted between exchange rates vis-à-vis the Thai baht. Tests are conducted for periods before and after the crisis. Results from the Johansen method of multivariate cointegration show a substantial change in the relationship between these real exchange rates before and after the Asian currency crisis. This result is found using rates based on three currencies: US dollar, yen and baht.     

Currency Substitution and the Stability of the Demand for Money in East Asia

Abstract

This paper models and tests the stability of the demand for money in five East Asian countries—Indonesia, Malaysia, Philippines, Singapore, and Thailand—in the context of an open economy. The Johansen multivariate cointegration vector error correction analysis against quarterly data covering the period 1985:1–2001:4 was used. It was found that a stationary long run cointegrating relationship exists between broad money, real income, domestic interest rates, foreign interest rates corrected for exchange rate depreciation, and the expected rate of depreciation of the exchange rate. The results show that US Treasury bills rates and the foreign exchange rate vis-à-vis the US dollar play a significant role in the East Asian countries money demand relationship. This suggests that currency substitution vis-à-vis the US dollar may be an important consideration in the design and implementation of monetary policy in the East Asian countries. Furthermore, the results show that the Asian currency crises impacted the money demand functions negatively in these countries. CUSUM and CUSUMSQ stability tests show no evidence of parameter instability of the money demand functions in three of the five countries throughout the period under investigation.     

PURCHASING POWER PARITY IN AFRICAN COUNTRIES: EVIDENCE FROM PANEL SURADF TEST

This study reexamines the validity of long-run purchasing power parity (PPP) hypothesis using a battery of panel unit root tests for 11 developing countries in Africa over the period 1980-2007. Based on the conventional panel unit root tests, we found evidence that the monthly real exchange rates in these countries were mean reverting. By contrast, the series-specific unit root test proposed by Breuer et al. (SURADF) reveals that only six of the 11 RERs series were stationary using the US dollar as reference currency. Additionally, our results reveal that there is stronger evidence of the parity condition with the Rand-based rates than in the other currency-based rates like the US dollar or Euro. We conclude that PPP holds in some, but not all, of the African countries according to the SURADF tests.     

The domestic term structure and international interest rate linkages: A cointegration analysis

The Domestic Term Structure and International Interest Rate Linkages. A Cointegration Analysis. -This paper analyzes cointegration relations between domestic interest rates with different maturities and between the US and German interest rates of the same maturity by means of the Johansen procedure and single-equation error correction models. It analyzes also the implied common stochastic trends. The author concludes that in the long run, interest spreads within both countries strongly dominate and linkages between the interest rates of both countries are only important in the short run.     

Public Revenue‐Expenditure Nexus in South Africa: Are there Asymmetries?

This paper re‐examines the government revenue and expenditure relationship in South Africa using Enders and Siklos' Threshold adjustment and Granger causality tests. The paper allows for structural breaks in the unit root and cointegration tests. The results indicate the absence of any asymmetries in both the threshold autoregression and momentum threshold autoregression specifications of adjustments in the South African's budgeting process. The estimated symmetric error‐correction models provide support for the fiscal synchronization hypothesis of government revenues and expenditures for long‐run and short‐run dynamic equilibrium. These findings indicate that the South African fiscal authorities should try to maintain or even improve the control of their fiscal policy instruments to sustain the prudent budgetary process.     

Monetary Policy Impulses and Retail Interest Rate Pass‐Through in Asian Banking Markets

This paper considers the integration of financial markets and mutual influences of monetary policies in the USA and Asia based on monthly data from 1994 to 2007. We used panel‐type and time‐series and quantile panel‐type error correction models to test the influences of expected and unexpected monetary policy impulses on the interest rate pass‐through mechanism in the financial markets of 9 Asian countries and the USA. The empirics show that if interest rate integration exists in the financial markets, the following effects are observed: (i) positive impulses of unexpected monetary policy will lead to an increase in the long‐run multiplier of the retail interest rate; (ii) the adjustment of retail interest rates with short‐run disequilibrium will lead to an increase in the long‐run markup; and (iii) the empirical results of quantile regression prove that when the interest variation is greater than the 0.5th quantile and unexpected monetary policy impulses are greater than the expected monetary policy impulses, the short‐run interest rate pass‐through mechanism becomes more unstable.     

Nonstationarity of Real Exchange Rates in the G7 Countries: Are They Cointegrated with Real Variables?

Using monthly data for the G7 countries in the post-Bretton Woods floating rate period, this paper demonstrates that almost all bilateral real exchange rates have unit roots and, hence, are nonstationary. Consequently, it rejects simple PPP as a long-run relationship. The paper also shows that many of these real exchange rates are cointegrated with other real economic variables such as relative labor productivity, terms-of-trade ratios, real trade balance ratios, and long-term real interest rate differentials. In particular, relative labor productivity is statistically significant with the correct sign for more than half of the country pairs for which cointegration is confirmed. This finding lends support to the Balassa–Samuelson productivity-bias hypothesis. These results imply that nonstationarity of real exchange rates and the consequent rejection of simple PPP can be consistent with the notion that real exchange rates revert to an equilibrium in the long run without deviating arbitrarily far from this equilibrium position.J. Japan. Int. Econ.,December 1997, pp. 523–547. Institute of Social Science, University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113, Japan, and Faculty of Business and Commerce, Meiji University, 1-1 Kanda, Surugadai, Chiyada-ku, Tokyo 101, Japan.     

Bilateral Trade Balances: Evidence from Malaysia*

This study examines the impacts of real exchange rates on the bilateral trade balances of Malaysia with the USA, Japan and Singapore. The results for the long‐run cointegrating vectors show that depreciation or devaluation of real exchange rates will improve bilateral trade balances. In the short run, there is some evidence of the J‐curve phenomenon. Changes in real money supply contribute greatly to changes in real exchange rates. Generally, changes in real exchange rates contribute significantly to changes in bilateral trade balances. Monetary policy can be used to influence bilateral trade balances.     

Purchasing Power Parity in High-Inflation Countries: A Cointegration Analysis of Integrated Variables with Trend Breaks

This paper examines the long-run validity of purchasing power parity (PPP) for four high-inflation countries. The method of Zivot and Andrews (1992) is employed to detect the time-series behavior of the exchange rates and consumer price indices of these countries. We find that these variables are integrated with some trend breaks. We then utilize these data to test PPP using Johansen's (1988) multivariate cointegration technique. The cointegration tests are conducted with the correction of the finite sample bias and the adjustment for trend breaks. The results are consistent with the argument that, during the recent floating exchange-rate period, PPP holds well, at least in a weak form, in high-inflation countries where the general price level movement overshadows the factors causing deviations from PPP.