Structural breaks, cointegration, and speed of adjustment Evidence from 12 LDCs money demand

This article estimates a theoretically coherent and empirically robust money demand function for 12 developing countries. The modeling procedure not only tests for a regime shift in the cointegrating equation, but also in the error correction model. Five specific hypotheses are examined. The article demonstrates that a long-run equilibrium relationship exists between real M1 or M2 balances, real income, inflation, exchange rate, foreign exchange risk, and foreign interest rates in the countries studied. The study provides information on the speed of adjustment to equilibrium and the median and mean time lags for adjustment of real money balances to changes in each determinant. Although our results provide more evidence against M1 than M2, this study clearly establishes that both M1 and M2 must be considered as viable policy tools for less developed countries.     

Structural breaks and relative price convergence among US cities

This paper examines whether inclusion of structural breaks helps resolve the puzzling result of excessively slow speed of convergence in relative prices across US cities while using long time series data on CPI. With an endogenously determined single break in 1985 in annual CPI data for 17 major US cities between 1918 and 2010, the panel unit root test results provide overwhelming evidence of convergence of relative prices across cities, which is consistent with the existing literature. Most importantly, this study finds that the speed of convergence with structural break is faster than that reported by previous panel studies with no structural break that use similar long time series data. Furthermore, correcting for small-sample bias (the so-called “Nickell Bias”) and time aggregation bias generates a half-life of 3.9 years, which is 64% shorter than the half-life estimate with no structural break and no bias correction. The breakpoint in 1985 coincides with the beginning of the period of Great Moderation during which inflation, along with other macro variables, has become more stable and its impact on relative prices across US cities seems to have waned.     

Tests for cointegration allowing for an unknown number of breaks

This paper introduces cointegration tests allowing for an unknown number of breaks. The introduced tests assume that the unspecified number of breaks is smaller than or equal to the maximum number of breaks set a priori. Monte Carlo simulations provide two main results. First, the proposed tests perform as well as the tests of Gregory and Hansen (1996a) and Hatemi-J (2008), which assume one or two breaks a priori, when the cointegration relationship has one or two breaks. Second, the proposed tests perform better than the tests of Gregory and Hansen (1996a) and Hatemi-J (2008) when the cointegration relationship has more than three breaks or persistent Markov switching shifts. We also provide empirical applications for the money demand of the U.S. The empirical results show that the proposed tests reject the null hypothesis of no cointegration as compared to other tests.     

Time-varying threshold cointegration and the law of one price

A theoretical model of the law of one price which allows for seasonality in transaction costs and supply and demand conditions between markets is developed. Bivariate three-regime threshold vector error correction models are applied to natural gas markets to examine seasonality in threshold levels. Results indicate that there are nonlinear adjustments to the law of one price in seven pair-wise markets (Chicago is used as the base market). In the natural gas sector, dynamic threshold effects relative to the Chicago market vary depending on season, geographical location and whether the market is an excess producing or consuming market.     

Nonstationarity,cointegration and structural breaks in the Australian term structure of interest rates

This article examines the unit-root property of the Australian short- and long-term interest rates using unit-root tests that accommodate a single or two breaks under the null and/or alternative hypothesis. Two breaks in interest rates are found to coincide with the 1982/83 and 1990/91 recessions or the 1993 inflation targeting period. We further investigate the implications of these structural breaks on the cointegrating relationship implied by the single, linear expectations hypothesis of the term structure of interest rates. While there is evidence that the data are consistent with the expectations hypothesis at the shorter end of the term structure, breaks in interest rates generate a shift in the cointegrating relationship, thus altering the information content of the term structure. Failing to account for a regime shift in the cointegration regression, the data erroneously supports the expectations hypothesis at the longer end of the term structure. These results have profound implications for policy makers who may inadequately exploit the information content of the term structure to predict future changes in inflation.     

Imports and exports in 50 countries: Tests of cointegration and structural breaks

This paper provides new evidence on the long-run convergence between imports and exports in 50 countries over the quarterly period 1973:2 to 1998:1. Cointegration analyses are based on the Johansen [Johansen, S. (1995). Likelihood-based inference in cointegrating vector autoregressive models. New York: Oxford University Press.] and the Stock and Watson [J. Am. Stat. Assoc. 83 (1988) 1097.] system approaches. Evidence of stability of the cointegration space is examined using the SupF test developed by Hansen [J. Bus. Econ. Stat. 10 (1992) 321]. Based on the Johansen technique, we find evidence in favor of cointegration in 35 of the 50 countries. In addition, cointegration is confirmed for all countries (except Mexico) using the Stock and Watson test. This finding indicates that macroeconomic policies have been effective in the long-run and suggests that these countries are largely not in violation of their international budget constraint. We find evidence that in most of the countries where the slope coefficient on the export variable is positive, the cointegrating coefficient is also unity. The cointegration space appears stable for most of the countries. Nonetheless, the results suggest that countries in the regions of the Middle East, Latin America, and Europe have cointegrating relations that are more unstable than those in other regions.     

LM cointegration tests allowing for an unknown number of breaks: implications for the forward rate unbiasedness hypothesis

This article extends the Lagrange multiplier (LM) cointegration test proposed by Westerlund and Edgerton (WE 2007) by allowing for an unknown number of breaks. Monte Carlo simulations provide two main results. First, a loss of power in the LM cointegration tests is detected when potential multiple breaks are ignored. Second, the modified testing procedures do not affect the asymptotic distribution and major properties of the tests of WE under the null, but noticeably increase their testing power in presence of multiple breaks. We also provide empirical applications of the proposed tests for the forward rate unbiasedness hypothesis (FRUH). The results reveal that the FRUH does hold when the effects of the multiple structural breaks are taken into account.     

Structural transformation and the oil price

What part of the high oil price can be explained by structural transformation in the developing world? Will continued structural transformation in these countries result in a permanently higher oil price? To address these issues I identify an inverted-U shaped relationship in the data between aggregate oil intensity and the extent of structural transformation: countries in the middle stages of transition spend the highest fraction of their income on oil. I construct and calibrate a multi-sector, multi-country, general equilibrium growth model that accounts for this fact by generating an endogenously falling aggregate elasticity of substitution between oil and non-oil inputs. The model is used to measure and isolate the impact of changing sectoral composition in the developing world on global oil demand and the oil price in the OECD. I find that structural transformation in non-OECD countries accounts for up to 53% of the oil price increase in the OECD between 1970 and 2010. However, the impact of structural transformation is temporary. Continued structural transformation induces falling oil intensity and an easing of the upward pressure on the oil price. Since a standard one-sector growth model misses this non-linearity, to understand the impact of growth on the oil price, it is necessary to take a more disaggregated view than is standard in macroeconomics.     

Using threshold cointegration to estimate asymmetric price transmission in the Swiss pork market

This paper employs threshold cointegration tests that allow for asymmetric adjustment towards a long-run equilibrium relationship to examine the relationship between producer and retail pork prices in Switzerland. The short-run adjustments are also examined with asymmetric error correction models that are compared to the conventional symmetric error correction models. The results indicate that price transmission between the producer and retail levels is asymmetric, in the sense that increases in producer prices that lead to declines in marketing margins are passed on more quickly to retail prices than decreases in producer prices that result in increases in the marketing margins.     

Long-run income and price elasticities of demand for Colombian nontraditional exports: a multivariate cointegration framework

A long run income and price elasticities of demand is estimated for Colombian nontraditional exports through a multivariate cointegration analysis. Based on the combination of cointegration and exogeneity concepts and the inclusion of the complete dynamic system, the paper shows the existence of a long-run relationship among nontraditional exports, relative price and foreign demand, and higher long-run elasticities than those provided by the long-run cointegration vector coefficients that are usually reported in the trade literature.     

Structural breaks in the lending interest rate pass-through and the euro

This paper investigates whether size and speed of the pass-through of market rates into short term business lending rates have increased in the wake of the introduction of the euro. Allowing for multiple unknown structural breaks we find two in four EMU countries, and in the UK as well, and a single one in five other countries. The pattern of dates fits national banking systems adjusting slowly to the new monetary regime and suggests caution in associating structural changes to the introduction of the euro. The estimated equilibrium pass-through in the last break-free period is on average more incomplete, hinting at a reduced effectiveness of the single monetary policy. These results run against the economic intuition that a reduced volatility in money market rates is bound to mitigate uncertainty and to ease therefore the transfer of policy rate changes to retail rates; the run-up to Basel 2 and a deterioration of competition in loan markets could be the motivations. Caution in extrapolating these findings to recent periods is suggested by the differences between the unharmonized and the new harmonized retail rates.     

Estimation of the effects of price on apartment water demand using cointegration and error correction techniques

Water price is a key instrument in regulating water demand in the residential sector. Many empirical studies have assessed the effects of price through quantifying the price elasticity of water demand. However, most of these studies have mainly focused on the single-family housing rather the multifamily housing. An in-depth understanding of the price elasticity of multifamily housing water demand is paramount for water planners in order to properly manage water use in the fast growing intensive housing developments in urban areas. This study investigates both the long-term and short-term price elasticities of water demand in the residential apartments in Auckland central city. Using 6 years of monthly time series data, the price elasticities were estimated through cointegration and error correction methods. The results showed that the price elasticities of water demand were ?0.14 and ?0.12 in the short term and the long term, respectively. The price is inelastic yet negative and statistically significant, thus it can play a role in demand management.     

Structural oil price shocks and policy uncertainty

Increases in the real price of oil not explained by changes in global oil production or by global real demand for commodities are associated with significant increases in economic policy uncertainty and its four components (the volume of newspaper coverage of policy uncertainty, CPI forecast interquartile range, tax legislation expiration, and federal expenditures forecast interquartile range). Oil-market specific demand shocks account for 31% of conditional variation in economic policy uncertainty and 22.9% of conditional variation in CPI forecast interquartile range after 24 months. Positive oil shocks due to global real aggregate demand for commodities significantly reduce economic policy uncertainty. Structural oil price shocks appear to have long-term consequences for economic policy uncertainty, and to the extent that the latter has impact on real activity the policy connection provides an additional channel by which oil price shocks have influence on the economy. As a robustness check, structural oil price shocks are significantly associated with economic policy uncertainty in Europe and energy-exporting Canada.     

Tests for cointegration rank and the initial condition

Many economic events involve initial observations that substantially deviate from long-run steady state. Such initial conditions are known to affect the power of univariate unit root tests diversely, whereas their impact on multivariate tests is largely unknown. This paper investigates the impact of the initial condition on the power of tests for cointegration rank, such as Johansen??s widely used likelihood ratio test, tests with prior adjustment for deterministic terms, and a test based on the eigenvalues of the companion matrix. We find that the power of the likelihood ratio test is increasing in the magnitude of the initial condition, whereas the power of the other tests is generally decreasing. We exploit these findings in an application to price convergence.     

Testing for cointegration and dynamic specification

Zusammenfassung Ziel der vorliegenden Arbeit ist die Spezifikation einer Gleichung zur Erklärung des gesamtwirtschaftlichen Stundenlohnsatzes. Zunächst soll ein Satz von Variablen gefunden werden, die als Erklärungsgrößen einer langfristigen Gleichgewichtsrelation angesehen werden können. Zur Klärung dieser Frage werden Kointegrationstests verwendet. Es zeigt sich, daß Realstundenlohnsatz, Produktivität, geleistete Arbeitsstunden und Arbeitslosenrate eine solche Beziehung bilden. Im zweiten Teil der Arbeit werden durch dynamische Spezifikation die kurzfristigen Anpassungsvorgänge an dieses langfristige Gleichgewicht modelliert.     

Fractional cointegration and the term structure

According to the expectations theory of the term structure of interest rates, the yield spread between long-term and short-term interest rates is an optimal predictor of future changes in short rates over the long-run. Results concerning the empirical validity of this hypothesis are not unanimous. These contradictions may be due to the fact that the traditional concept of cointegration is too restrictive. We refer here to the concept of fractional cointegration introduced by Granger (1986). We study the expectations theory by testing for the existence of a (fractional) cointegration relationship between short-term and long-term interest rates. There is evidence of fractional cointegration between interest rates for the G7 countries, with the exception of Germany.First version received: July 2002 / Final version received: July 2003We thank two anonymous referees for very helpful and detailed comments.     

Bootstrapping the autoregressive distributed lag test for cointegration

We propose a bootstrap autoregressive-distributed lag (ARDL) test. By applying the appropriate bootstrap method, some weaknesses underlying the Pesaran, Shin and Smith ARDL bounds test are addressed including size and power properties and the elimination of inconclusive inferences. In addition, inferences based solely on the significance of the F-test and single t-test from the ARDL bounds test are not sufficient to avoid degenerate cases. The bootstrap ARDL test provides an additional test on the significance of coefficients on lagged levels of the regressors, which provides a better insight into the cointegration status of the model.