Revisiting the Link Between Stock Prices and Goods Prices in OECD Countries

Fisher hypothesis postulates positive relation between stock return and inflation; however early studies document negative relationship between the two and they conclude that stock cannot be used as a hedge against inflation. In this paper we explore long‐run nonlinear relationship between stock price and goods price. Our sample consists of 19 OECD countries; all or some of these countries have been studied before with the findings of linear cointegration between the stock index and goods price index. Based on unit root tests and linear cointegration test, we apply threshold cointegration tests, Autoregressive Distributed Lag (ARDL) cointegration test and panel VAR method. With all these econometric methods we arrive at heterogeneous findings as follows: two countries have linear cointegration, five countries have threshold cointegration, nine countries do not have any cointegration and finally two countries provide inconclusive results. Estimates of Fisher coefficient provided by linear and nonlinear cointegration methods, which range between 1.27 and 1.86, are consistent with previous studies. Impulse response analysis from panel VAR for countries having no cointegrating relation shows that shock to inflation produces negative response in stock return, which supports findings of earlier studies.     

The sustainability of the current account in the Czech Republic,Hungary and Slovenia

The aim of this paper is to investigate empirically the sustainability of the current account in three Central European countries, the Czech Republic, Hungary and Slovenia, since their move towards market economy about 15 years ago. The analysis is based on the intertemporal approach to the current account which states that if real exports and real imports are integrated of order one then cointegration between them is a necessary and sufficient condition for the economy to satisfy its intertemporal budget constraint. On the basis of various unit-root and cointegration tests on the shares of real exports and imports in real GDP, this study concludes that the Czech Republic and Slovenia are not in violation of their intertemporal budget constraint and their trade imbalances are sustainable. However, the real exports and imports of these countries, and also the export, import measures of Hungary, do not seem to behave as random walks, excluding the possibility of cointegration between them.      

Intertemporal sustainability of current account imbalances: New evidence from the OECD countries

This study estimates the intertemporal model for the relationship between exports and imports and examines the sustainability of current account deficits (CADs) and the validity of intertemporal budget constraint for 24 Organisation for Economic Co‐operation and Development countries. The standard ordinary least squares (OLS)‐based two‐step Engle and Granger test, the cointegration regression Durbin–Watson (CRDW) test, and the Stock–Watson test performed on the one‐regime model with time‐invariant parameters and no structural break provide mixed support for the presence of cointegration between exports and imports. The recursive least squares‐based cumulative sum of recursive residuals (CUSUM) and the cumulative sum of squares of recursive residuals (CUSUMSQ) tests and the OLS‐based Andrews‐Quandt (AQ) and Andrews – Ploberger (AP) tests suggest the presence of structural breaks in the long‐run relationship between exports and imports for a number of countries. The end‐of‐sample new cointegration breakdown tests performed on the OLS, fully modified OLS, and full‐information maximum‐likelihood estimates of the model suggest the presence of cointegration between exports and imports for most countries. The dominant support for cointegration between trade flows points toward the sustainability of CADs and the validity of intertemporal budget constraint. The macroeconomic stabilization policies seem to have been effective in correcting the market failures and maintaining the steady‐state equilibrium relationship between trade flows in the sample countries. The findings of this study have important implications for empirical research. The structural breaks in the cointegrating vector could occur even over the short time periods and at any point in time. It is essentially important to assess the sustainability of the external position in the presence of long‐period as well as short‐period breaks in the cointegrating vector.     

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.     

Are international value premiums driven by the same set of fundamentals?

This paper investigates the long-run behaviour of international value premium price indices for G7 countries using data from January 1975 to December 2002. We use Johansen [Johansen, S., 1991. Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica 59, 1551–1580; Johansen, S., 1995. Likelihood-based Inference in Cointegrated Vector Autoregressive Models, Oxford University Press] cointegration methodology and find one cointegrating vector for the period of December 1987 to December 2002. The results are robust to local currencies and a common currency. The cointegrating vector may reflect expectations about future economic activity since investors can adjust demand for either value or growth stocks depending on expected economic growth. Our results show that the cointegrating relationship can predict both future changes in the growth of logged industrial production and future stock market returns.     

Does exchange-rate volatility depress export flows: The case of LDCs

In the area of international trade, few studies have examined whether increases in exchange-rate volatility depress trade flows of LDCs. The aim of this paper is to investigate empirically the impact of exchange-rate volatility on the export flows of 10 developing countries over the quarterly period 1973–98. The econometric analysis exploits the theory of cointegration, given the obvious nonstationarity of the data. Estimates of the cointegrating relations are obtained using Johansen's multivariate procedure. Evidence of stability of the cointegrating space is examined using Hansen's [1992a] tests. Short-run dynamic modelling is accomplished using the error-correction technique, and the stability test results are obtained using Hansen [1992b] tests. In conformity with theoretical considerations, the results indicate that increases in the exchange-rate volatility exert a significant negative effect upon export demand in both the short-run and the long-run in most of the countries studied. These effects may result in significant reallocation of resources by market participants.     

FDIC Coverage on bank failures: Cointegration analysis using annual data, 1942–91

The present study empirically investigates whether in the U.S. federal government-provided deposit insurance, which was intended to prevent runs on banks and to protect depositors of modest means, has acted to induce increased bank failures. This issue has been investigated earlier, but only with regression analysis, and it remains unresolved since results vary sharply from one study to the next. By contrast, the present study uses cointegration techniques to investigate this problem. The cointegration analysis finds strong evidence of a cointegrating relationship between the bank failure rate and the extent of central government-provided deposit insurance, as well as other variables. Maximum eigenvalue and trace test results, along with normalized cointegrating vectors and likelihood ratio test results, are provided for examination.     

我国货币需求的协整分析及其货币政策建议

本文运用协整以及弱外生和短期因果关系检验 ,对我国货币需求的长期稳定性进行实证 ,由此而产生的主要结论为 :我国货币需求的长期稳定性 (协整 )依赖于时间趋势 ,货币政策目标变量为M1,实际货币政策效应主要体现在促进经济增长。我国货币需求和利率是关于协整向量的弱外生变量。基于上述结论所提出的政策建议为 :当前的货币政策重点应转向于防范通胀     

A Cointegrating approach to budget deficits and long-term interest rates

A cointegrating approach is undertaken in this study to determine if there is a long-run equilibrium relationship between budget deficits and long-term interest rates for the United States and nine European countries. The cointegration approach consists of conducting cointegration tests and then testing several hypothesized values for the deficit and price expectations variables. The cointegration results suggest the existence of several significant cointegrating vectors for each of the ten countries, which would seem to appeal to the view of budget deficits having a positive impact on long-term interest rates. The hypothesized values for the deficit and price expectations variables are found to be too strict since the hypotheses are rejected in every case but one.     

Testing the validity of PPP theory for African countries

This study examines the purchasing power parity theory for 14 African countries by applying a recent composite time series method that incorporates the Fourier approximation. The structural breaks are modelled as a gradual smooth process by means of a Fourier component. The Fourier unit root test failed to find any evidence showing that real exchange rates for these 14 countries have mean-reverting tendencies. However, both cointegration and Fourier cointegration tests detect a stable long-term relation between the nominal exchange rate and relative price levels for 8 out of 14 countries; moreover, for five countries Fourier component in cointegration analysis is found to suit quite well.     

New panel results on cointegration of international health expenditure and GDP

This article tests for existence of cointegration between health expenditure and GDP using data from 25 OECD countries for the period 19607ndash;1997. The empirical modelling is based on a heterogeneous bivariate vector error correction panel model that allows for trending data as well as intercepts and trends in the cointegrating relations. Univariate country-by-country and panel unit root tests generally fail to reject the null of a unit root in the health expenditure and GDP variables. Country-by-country results based on the Johansen multivariate likelihood-based inference indicate somewhat mixed results on country-specific cointegration with a rank of one found for 12 countries and a rank of zero for the remaining 13 countries. Application of a new panel test for cointegration rank with higher power than the individual tests indicates that health expenditure and GDP are cointegrated around linear trends.     

Correct cointegration tests of the long-run relationship between nominal interest and inflation

The Fisher (1930) hypothesis suggests that a long-run equilibrium relationship exists between the non-stationary series: nominal interest and expected inflation. Testing such a cointegrating relationship is complicated by the presence of the unobserved ex antereal rate of interest in residuals from the cointegrating regression. Assumptions concerning the stochastic properties of the expected real rate of interest are examined, and two proxies for the ex antereal rate are employed in multivariate cointegration tests of the Fisher hypothesis.     

Analysing money demand relation for OECD countries using common factors

This article investigates the existence of a long-run money demand relation for a panel data consisting of 13 OECD countries. The analysis is based on the most recent data. The existence of a long-run money demand relation is tested with two new meta-analytic panel cointegrating rank tests which are robust to cross-sectional dependence. Cross-sectional dependency in the data generating process is modelled by unobserved common factors. The observed data are decomposed into idiosyncratic and common components, and these two components are analysed separately to find out the driving forces of the long-run stationary relationship. The evidence shows that the long-run money demand relation is driven by the cross-unit cointegration. Finally, the long-run relation is estimated by taking the common factors into account.     

The Long Run Demand for Broad Money in Australia Subject to Regime Shifts

The goal is to determine if there is a stable Broad Money demand relationship for Australia. Previous studies have not reached a consensus on this important issue, partly because the time series techniques used do not accommodate structural breaks. A standard multivariate cointegration analysis is conducted on monthly data over the period 1976(3) to 1998(4). It reveals some evidence for the presence of cointegration since one cointegrating vector is found. This involves broad money, the spread between interest on broad money and on non-money assets and real GDP. The evidence of cointegration is again present when a structural break is found in the relationship using Gregory and Hansen (GH) methodology. This occurs in 1991 coinciding with a deep recession and policy induced, interest rate reductions. The income elasticity of demand exceeds one, reacts positively to the interest spread and negatively to inflation.     

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.     

Testing fiscal sustainability in Poland: a Bayesian analysis of cointegration

Fiscal sustainability is a central topic for most of the transition economies of Eastern Europe. This paper focuses on a particular country: Poland. The main purpose is to investigate, empirically, whether the post-transition fiscal policy is consistent with the intertemporal budget constraint, used as a formal theoretical framework. To test debt stabilization, the empirical analysis is made in two steps: first, we use a Bayesian methodology to conduct inference about the cointegrating relationship between budget revenues and (inclusive of interest) expenditures and to select the cointegrating rank. Second, we apply Bayesian inference to the estimation of the cointegrating vector and of the adjustment parameters. With a single cointegrating relation, we make use of some known results concerning the posterior density of the cointegrating vector, which belongs to the poly-t densities class. In this way, we experiment the usefulness of Bayesian inference in precisely assessing the magnitude of the cointegrating vector. Moreover, we show to what extent the likelihood of the data is important in revising the available prior information, relying on numerical integration techniques.     

Re-examining the exchange rate pass-through into import prices using non-linear estimation techniques: Threshold cointegration

We document a significant threshold cointegrating relationship among effective nominal exchange rates and import prices. Using quarterly data for five industries of 16 OECD countries, we find that the degree of pass-through improves dramatically from the 50% average documented in the literature once threshold effects are recognized. The results of our threshold cointegration model show that import prices respond faster and by a larger extent to nominal exchange rate shocks than is the case for more conventional models. These findings give empirical support to the hypothesis that an equilibrium rate of pass-through exists (e.g. [Bacchetta, P., & Van Wincoop, E. (2005). A Theory of the currency denomination of international trade, Journal of International Economics 67, 295–319; Devereux, M., Engel, C., & Storgaard, P. (2004). Endogenous exchange rate pass-through when nominal prices are set in advance, Journal of International Economics 63(2), 263–291]).     

Export-led Growth and Import Compression: Further Time Series Evidence From LDCs

This paper conducts tests of the export-led growth and the import-compression hypotheses for four less developed countries (LDCs) – India, Nigeria, Fiji and Papua New Guinea (PNG). Based on Johansen's multiple cointegration test preceded by unit root tests, we test for cointegration between real output, exports and imports. Non-rejection of cointegration between the variables excludes the possibility of Granger non-causality and suggests at least one way Granger causality. Real output, exports and imports are found to be cointegrated in two of the countries and the resulting error-correction models suggest that Granger causality runs from exports and imports to real output in these cases. Exogeneity tests are conducted for exports with respect to real output. However, while the assumption of weak exogeneity is validated in two of the countries, the null hypothesis of super exogeneity is rejected. The test results therefore cast doubts on policy recommendations for the LDCs based on the export-led growth hypothesis.     

Long‐Run PPP under the Presence of Near‐to‐Unit Roots: The Case of the British Pound–US Dollar Rate*

Empirical tests typically provide evidence that the British pound–US dollar exchange rate and the relative wholesale price index contain exact unit roots and exhibit cointegration. However, the cointegrating vector is significantly different from [1, ?1], thus raising doubts on the validity of the purchasing power parity (PPP) hypothesis. Following Elliott (1998 ), we show that if the exchange rate and relative price series contain near‐to‐unit roots in the context of a bivariate system, then any inference on the “cointegrating” vector and consequently on PPP, which is based on standard cointegration estimation methods, will be misleading. We then argue that the existing evidence against the PPP hypothesis in the British pound–US dollar market can be attributed to the finite sample bias of the standard cointegration estimators, arising from an endogenous and “nearly” nonstationary regressor. We also show that when robust procedures are employed the evidence favors the PPP hypothesis.     

Money and inflation in Germany: A cointegration analysis

This paper analyses the relation between money and inflation in Germany in a cost-push/demand-pull model of an open small economy by means of cointegration methods. The full-information-maximum-likelihood method of Johansen as well as structural methods are applied to datasubsets and the full data set. The focus of the paper is on tests for overidentifying restrictions and for weak and strong exogeneity within these data sets. The result of the paper is that the money stock, the price level and gross national product are endogenous whereas the interest rate and the real import price are both weakly and strongly exogenous. By means of the price cointegration relation we illustrate how monetary targeting should react to imported inflation.