Foreign direct investment and exports: a time series approach

The impact of the accelerated internationalization of the last decade on the Austrian economy is a controversial issue. Granger's concept of casuality is used to investigate one aspect of the internationalization of production: the realtionship between foreign outward direct investment and exports using aggregate flow data from the Austrian economy. The stationarity of the time series is examined and cointegration tests for the adequacy of the multivariate time series approach are performed. The estimation results suggest significant causality of Austrian foreign outward direct investment and exports in both directions. Impulse response analysis and varience decomposition show a very slow dynamic response of both variables to exogenous shocks of the other. It furthermnore indicates the possiblity of a positive effect of exogeneously increased foreign direct investment on exports and a negative effect of export shocks on foreign direct investment; however, significant long-run effects are not established.     

The Feldstein–Horioka model re-visited for African countries

We study the relationship between the saving and investment rates for 20 African countries using a long period of data. A high correlation between saving and investment is often taken as evidence of capital immobility. We use the new Ng–Perron unit root tests to examine the stationarity of saving and investment rates. Both Johansen cointegration tests and fractional cointegration tests are used. The results are mixed. The Johansen cointegration tests show that the saving and investment rates are cointegrated only for Rwanda and South Africa. This implies that for the other 18 countries, there is evidence of capital mobility. The fractional cointegration test results are different. The two rates are found to be fractionally cointegrated for the following 12 countries: Algeria, Burundi, Egypt, Morocco, Niger, Rwanda, Senegal, South Africa, Swaziland, Tunisia, Tanzania and Zimbabwe. For Cote d’Ivoire, Kenya, Lesotho and Sierra Leone there is some evidence of capital mobility while the results for Ethiopia, Malawi, Mauritius and Nigeria are mixed.     

Market power and exchange rate pass-through

In this paper we provide new empirical evidence on the relationship between market power, as measured by market share, and incomplete exchange rate pass-through. The role of market power is examined in the context of a Cournot model, which is estimated with data relating to Japan's presence in the US market. To test for the existence of possible aggregation biases due to sectoral heterogeneity, estimations are carried out on time series data for the total economy and the manufacturing sector and on panel data for five manufacturing industries at the three-digit level of classification, using the Johansen multivariate cointegration technique and the recently developed by [Larsson, R., Lyhagen, J., & Lothgren, M. (2001). Likelihood-based cointegration tests in heterogeneous panels. Econometrics Journal, 4, 109–142] multivariate panel cointegration technique. Hypotheses about the degree of pass-through are tested as restrictions on estimated equilibrium pricing equations and robustness tests are performed. The empirical results indicate that Japanese firms have market power and this validates the use of an imperfect competition model. However, it appears that market power is not the only element on which to base the analysis of the incomplete exchange rate pass-through by Japanese firms.     

A Test of Long-run Purchasing Power Parity Allowing for Structural Breaks*

If exchange rates and prices are integrated processes, standard econometric tests of the purchasing power parity (PPP) hypothesis may be biased towards rejection. This paper avoids this problem by using the Engle and Granger (1987) theory of cointegrated processes. If the absolute version of purchasing power parity is true, and nominal exchange rates and prices are integrated processes, inter-commodity arbitrage should ensure that the real exchange rate is stationary. The stationarity hypothesis is tested using Australian real exchange rate data for the 1890–1984 period We find that the effective real exchange rate cannot be modelled as a stationary process and therefore reject the absolute version of PPP. We also employ a test for structural breaks due to, for instance, the oil price shock and find mixed results. Another interpretation of our results is that the real exchange rate was affected by a series of permanent, real shocks during the sample period     

The Feldstein–Horioka Puzzle and structural breaks: Evidence from EU members

The purpose of this paper is to investigate the level of capital mobility in European Union members using the Feldstein–Horioka puzzle proposed by Feldstein and Horioka (1980) in order to investigate relations between saving and investment flows. In this paper, data for 23 European countries were used over the period of 1995–2009 on the quarterly basis. Two different tests were used to estimate the stationarity of the model variables, which are the Ng and Perron (2001) unit root test procedure and approach proposed by Zivot and Andrews (1992) for unit root test allowing for a structural shift. Then the Kejriwal and Perron (2008, 2010) structural break test was applied to determine the presence of structural breaks in series. In most countries except Belgium and Finland UDmax and WDmax tests rejected the hypothesis of no breaks. To test the cointegration relationships between investment and saving flows of European Union members three different cointegration techniques were applied to the data. Firstly, the Johansen (1988) cointegration approach was used for the case of no cointegration shifts, then the Gregory and Hansen (1996) cointegration test was applied, which allows for one structural shift. Finally, again the Johansen' cointegration approach was used; however, this time with the inclusion of dummy variables related to earlier selected structural break locations. The empirical results provided stronger evidence of cointegration between investment and saving variables in the case of structural break accommodation compared to the case where the presence of structural breaks was ignored. The estimated saving retention coefficient in the presence of structural breaks using the Kejriwal and Perron (2008, 2010) approach appeared relatively low in many cases, illustrating by this the openness of estimated countries. In general, world and European countries with time have a tendency to a higher level of their capital market openness. Estimations of a saving retention coefficient in the presence of structural changes do not support the existence of the Feldstein–Horioka Puzzle in the considered EU countries, except Belgium.     

Market Efficiency and Apparent Unit Roots: An Application to Exchange Rates

Prices in efficient markets are influenced by trading based on past patterns in the series. This induces parameter instability and near-random-walk behaviour in any time-series model of such data. Simulation results suggest that this parameter instability makes stationary series more likely to be erroneously classified as nonstationary, according to standard unit root or stationarity tests. It is shown that individual real exchange rate series appear individually non-stationary, especially for tests based on a null of stationarity, even though they appear stationary when treated as a panel.     

An Empirical Analysis of Australian Labour Productivity

This study presents a model capturing sources of Australian aggregate labour productivity using annual time series data from 1970 to 2001. Labour productivity, or real output per hour worked, in this model is determined by real net capital stock in information technology and telecommunications (ITT), real net capital stock in the non-ITT sector, trade openness, human capital, the wage rate, international competitiveness, and the union membership rate. Given the lack of long and consistent time series data, multivariate cointegration techniques are inappropriate as the cointegration results will be sensitive to the lag length, the inclusion or exclusion of the intercept term or a trend in the cointegration equation and/or the vector autoregression (VAR) specification. Therefore, the Engle-Granger representation theorem and the Hausman weak exogeneity test have been employed to determine the short and long-term drivers of Australian productivity. Empirical estimates indicate that, in the long-term, policies aimed at promoting various types of investment, trade openness, international competitiveness, and the use of wage as a stimulant in a decentralised wage negotiation system, will improve labour productivity. In the short term, all the above variables except for human capital and labour reforms, which both need more time to evolve, determine productivity performance.     

Does oil price variability affect ASEAN exchange rates? Evidence from panel cointegration test

Using panel data, this article investigates the long-run relationship between real oil prices and real exchange rates for selected ASEAN countries by utilizing quarterly data from 1973:Q1 to 2013:Q4. The modelling implementation starts with the determination of the stationarity condition of the variables which are found to be integrated of order one. Using Maddala and Wu’s (1999) panel cointegration test, the article finds evidence of cointegration among the variables. The fully modified OLS (FMOLS) and dynamic OLS (DOLS) are then used to estimate the long-run relationship between the variables, followed by applying Toda–Yamamoto causality test. The findings exhibit bidirectional causality between real oil prices and real exchange rates in the long run, where it is highly significant.     

The Interdependence of Australian and Foreign Real Interest Rates

We assess the interdependence of the Australian and foreign (USA, Japan, UK, Canada, Germany, NZ) short-term real rates of interest using a quarterly time series: 1970(1) to 1997(4). Applying Zivot and Andrews (1992) tests for stationarity subject to structural breaks we find all series to be 1(1). Structural breaks occurring in each series at different times are explained by policy changes, institutional characteristics or shocks such as the second oil crisis. Conventional bivariate cointegration tests (without breaks) provide limited evidence of interdependence, however using the Gregory Hansen (1996a,b) technique it is clear that foreign and Australian rates are interrelated once structural breaks are accommodated. Multivariate cointegration and error correction modelling confirm this finding. Policy implications are indicated.     

Internal and external exchange rate equilibrium in a cointegration framework. An application to the Spanish peseta

A simple cointegration methodology is used to compute the equilibrium real exchange rate for the peseta. The stock of foreign assets and the evolution of sectoral prices are considered to be the fundamentals for the real exchange rate. After testing for cointegration, we proceed to decompose the series into a permanent and a transitory component, following the method devised by Gonzalo and Granger. The permanent component of the real exchange rate corresponds to its (time-varying) equilibrium value, and the deviation of the actual real exchange rate from this equilibrium value gives an estimation of the degree of misalignment of the real exchange rate. By the end of the sample (1998:1), the peseta is estimated to be undervalued around 6%.     

Long-run versus short-run behaviour of the real exchange rates

This paper discusses the mean stationarity of real exchange rates by using new time series methods and new tests. The question whether the real exchange rates have a unit root or are level reverting is set in the general and flexible framework of fractionally integrated processes. The estimations and tests sustain the claim that real exchange rates may be nonstationary and not revert to any short-run parity. However, estimations also suggest that real exchange rates behave differently on the short and on the long run and that they may revert to parity in a century-long period.     

The cyclical response of employment to output changes: United States manufacturing industries, 1948 to 1983

This paper provides new evidence on the income elasticity of health care by combining stationarity and cointegration tests of health care expenditure and incomes with estimates of the cointegrating relationship between them. A recently updated dataset of health care expenditures and disposable personal income for the US states for the years 1966–1998 is used. The principal findings are that health care expenditures and incomes at the state level are non-stationary and cointegrated. Dynamic OLS cointegrating regressions of the pooled state time series estimate the income elasticity of health care at 0.817 to 0.844, well below unity, confirming that health care expenditure, even at the aggregate level, is a necessity good.     

An empirical test of purchasing power parity in selected developing countries: a panel data approach

Abstract

This paper examines the empirical validity of Purchasing Power Parity (PPP) for certain large developing economies by using a panel unit root methodology. The test results show that a long run real exchange rate depreciation trend exists in certain developing countries. Without considering this depreciation trend, it is hard to verify the stationarity and to explain the existence of the extremely long half-lives of the real exchange rates. When a linear time trend is included in the tests, the results tend to support the stationarity of the underlying real exchange rate processes, and the half-lives are significantly shorter and their range can be explained by transitory disturbances.     

Foreign Direct Investment Inflows and Economic Growth: The Case of Korea

The current study examines the relationship between FDI inflows and economic growth of Korea and tests the Bhagwati hypothesis which says that FDI inflow is more beneficial to economic growth in an open trade regime in a multivariate framework. Unlike previous works on the concerned hypothesis, a small‐sample cointegration test is applied to the time‐series data. There is no evidence of cointegration among the variables. The Granger causality test results show that, although FDI inflows do not cause per capita real GDP, the latter is revealed to cause the former when the economic crisis dummy variable is included. There is a unidirectional short‐run causality from domestic investment to per capita real GDP growth rate. The case of Korea does not support the Bhagwati hypothesis.     

Unit root and cointegration tests: timeseries versus panel estimates for international health expenditure models

Classical regression estimates of the determinants of the OECD health expenditures are useful for policy formulation and evaluation. However, if the underlying timeseries data are not collectively stationary in levels, the estimated parameters are faulty and can misguide health policy. Until very recently, the crucial stationarity tests were ignored in a large number of studies on international comparisons. Stationarity (ADF, Phillips-Perron, IPS heterogeneous panel) and cointegration (Engle-Granger bivariate, Johansen's multivariate) tests are conducted here using 1960–1997 health expenditures data (1998 CD ROM) of 19 OECD countries. It is found that extending the time series data length affects the order of integration and number of cointegrating vectors. However, it is arguable whether the order of integration decreases or increases as more observations are added for testing. The failure of the Johansen and Engle-Granger cointegration tests for most of the OECD countries cautions policy makers against reliance on earlier research findings that were based on unstable relationships among variables in the regression models. (This is not the case for the UK, Greece and Ireland; policy implications have been derived for the UK.) Consequently, data calibrated in growth rates may be more appropriate for investigating the long run relationships collectively in a panel of OECD health expenditure model specifications.     

Non-stationary Interest Rate Differentials and the Role of Monetary Policy

Abstract

The present work deals with a frequently detected failure of the uncovered interest rate parity (UIP) – the absence of bivariate cointegration between domestic and foreign interest rates. We explain the non-stationarity of the interest differential via central bank reactions to exchange rate variations. Thereby, the exchange rate in levels introduces an additional stochastic trend into the system. Trivariate cointegration between the interest rates and the exchange rate accounts for the missing stationarity property of the interest differential. We apply the concept to the case of Turkey and Europe, where we can validate the theoretical considerations by multivariate time series techniques.     

Crowding-in and crowding-out effects of public investments in the Portuguese economy

This study analyses the effects of public and private investment on Portuguese GDP in the period 1960–2013. After a review of the literature based on works developed in the context of VAR analyses, an alternative econometric strategy is proposed. We opt for ADL models using the methodology of Krolzig-Hendry-Doornik. We estimate direct effects of public and private investments on themselves and also a system of simultaneous equations and calculate the multipliers of the exogenous variables, represented by the current external transfers, the short-run nominal interest rate and public debt ratio. Additionally, we tested a model with the first three equations of the system, using beyond those variables the real exchange rate as an exogenous variable. The results point to the existence of a complementarity between private investment and public investment rather than any idea of substitutability. We find that public debt has important negative effects on public and private investments and consequently on output. Public investment has positive effects on output and on private investment. The appreciation of the real exchange rate has an important and long-lasting negative effect upon output, confirming the presence of a mechanism associated with a Dutch-disease phenomenon in the Portuguese economy.     

Structural Breaks and the Equilibrium Chinese Yuan/US Dollar Real Exchange Rate: A FEER Approach

This paper examines the equilibrium Chinese yuan/US dollar (CNY/USD) real exchange rate within the framework of the fundamental equilibrium exchange rate (FEER) model. Endogenous structural breaks are allowed for in all cointegration relationships. Macroeconomic fundamentals that affect medium‐term savings and investment and hence, the sustainable current account, are also highlighted. A unique set of quarterly data for the post‐reform period (1982–2009) is constructed. This paper finds structural breaks in all trade and the sustainable current account equations. The misalignment rates show that the real exchange rate was overvalued in most years until 2003, followed by undervaluation during 2004–09. However, the average misalignment rates and revaluation required to correct this undervaluation are not as large as suggested by previous studies, with the undervaluation rate declining sharply in 2009. Further, misalignment rates are computed using a sustainable current account of 3%. The findings suggest such exogenous input leads to results biased towards larger undervaluation.     

New tests for stationarity and parity reversion: Evidence on New Zealand real exchange rates

The present paper discusses the stochastic stationarity of New Zealand exchange rates in light of new time series methods and new tests. The question of whether the real exchange rates have a unit root or are mean reverting is set in the general framework of fractionally integrated models. The estimates sustain the claim that New Zealand real exchange series are not stationary. However, it is shown that nonstationarity is compatible with parity reversion in the framework of fractional unit-root models.     

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.