Long-run equilibrium between budget deficits and long-term interest rates

Recently, there has been much concern about the size of federal budget deficit and its impact on interest rates. The peace time recovery after the 1981–1982 recession was the longest in U.S. history, accompanied by the largest budget deficit to GDP ratios. The present study investigates the effects of cyclically-adjusted federal deficits on long-term interest rates for 1970:1–1991:2. Using Johansen-Juselius procedures, we find evidence of a long-run relationship between federal budget deficits and long-term interest rates.     

Budget deficits and long-term interest rates: 1973–91

This study investigates the relationship between nominal long-term interest rates and central government budget deficits during the post-Bretton Woods era in Italy. The analysis is based in an open-economy, loanable-funds framework. The cointegration results indicate, among other things, the existence of a long-term positive relationship between the long-term interest rate and the deficit. An earlier draft of this paper was presented at the Forty-Fourth International Atlantic Economic Society Conference in Philadelphia, Pennsylvania, October 9–12, 1997.     

Causality tests of budget and current account deficits: Cross-country comparisons

This study attempts to determine the causal relationship between budget and current account deficits as well as the direction of such causality. A selected sample of some developed and developing countries with annual time series data is used and cointegration techniques are applied to bring evidence regarding this important issue. Our results do not support any long-run relationship between the two deficits for developed countries while the data for developing countries do not reject such a relationship. However, our results suggest a causal relationship between the two deficits for most of the sample countries. First version received: November 1996/final version received: September 1998     

Budget deficits and interest rates: a fresh perspective

We extend the literature on budget deficits and interest rates in three ways: we examine both advanced and emerging economies and for the first time a large emerging market panel; explore interactions to explain some of the heterogeneity in the literature; and apply system Generalized Method of Moments (GMM). There is overall a highly significant positive effect of budget deficits on interest rates, but the effect depends on interaction terms and is only significant under one of the several conditions: deficits are high, mostly domestically financed, or interact with high domestic debt; financial openness is low; interest rates are liberalized; or financial depth is low.     

国际油价波动对经济增长的影响——基于中国的实证分析

基于1990年1月至2009年3月的月度数据,本文实证分析了我国经济增长与国际石油价格之间的长期变动关系,其特点在于,采用稳健性较强的T-Y因果检验来分析油价与经济增长的Granger因果关系,同时,运用非对称协整技术以考察油价与经济增长之间的非线性关系。研究发现：①长期中油价是我国经济增长的单向Granger原因;②油价与我国经济增长之间存在非对称协整关系,油价上涨对经济活动的负面影响大于油价下跌的积极影响。基于中国经济运行的实际,本文还分析了实证结果背后的原因,并提出当前国际金融危机背景下,油价呈下跌趋势,需抓住有利时机,动用外汇储备,大力购入石油资源,建立起石油战略储备;在经济复苏、油价上涨时,可以启动石油战略储备来减少石油供应冲击,从而有助于及时保证我国经济平稳快速增长的政策建议。     

Monetary policy and long-term US interest rates

This paper assesses the effect of federal funds rate innovations on longer-term US nominal interest rates across different periods. The evidence suggests that these responses change with changes in the monetary policy regime. Time periods considered are pre- and post-1979 and different Federal Reserve Chairman’s tenure. The response of longer-term interest rates to federal funds rate innovations are shown to be smaller and less persistent in the post-1979 period when the Federal Reserve placed more emphasis on inflation.     

Budget deficits, capital flows, and long-term interest rates: Cointegration findings for the united kingdom

This study uses cointegration tools to decide whether a long-term relationship exists between budget deficits and nominal long-term interest rates in the United Kingdom, as previous regression estimates have implicitly assumed. Based on maximum eigenvalue, trace, and likelihood ratio tests, as well as two cointegrating vectors, this study finds that a long-term positive relationship exists between the nominal 20-year government bond rate and the central government budget deficit.     

The relationship between agricultural commodity prices,crude oil prices and US dollar exchange rates: a panel VAR approach and causality analysis

This study examines the relationship between crude oil prices, US dollar exchange rates and 30 selected international agricultural prices and five international fertilizer prices in a panel framework. The study uses panel VAR methods and Granger causality tests on panel data sets of agricultural commodity prices (as well as specific agricultural commodity sub-groups) and fertilizer prices with monthly observations of the period from June 1983 to June 2013. The empirical results of the present study indicate that crude oil prices as well as US dollar exchange rates affect international agricultural commodity and fertilizer prices. Furthermore, contrary to the findings of several studies in the literature, the present study supports bidirectional panel causality effects between crude oil prices and international agricultural prices as well as between US exchange rates and international agricultural prices.     

Optimizing time-series forecasts for inflation and interest rates using simulation and model averaging

Motivated by economic-theory concepts – the Fisher hypothesis and the theory of the term structure – we consider a small set of simple bivariate closed-loop time-series models for the prediction of price inflation and of long- and short-term interest rates. The set includes vector autoregressions (VAR) in levels and in differences, a cointegrated VAR and a non-linear VAR with threshold cointegration based on data from Germany, Japan, UK and the US. Following a traditional comparative evaluation of predictive accuracy, we subject all structures to a mutual validation using parametric bootstrapping. Ultimately, we utilize the recently developed technique of Mallows model averaging to explore the potential of improving upon the predictions through combinations. While the simulations confirm the traded wisdom that VARs in differences optimize one-step prediction and that error correction helps at larger horizons, the model-averaging experiments point at problems in allotting an adequate penalty for the complexity of candidate models.     

Conditional correlations in the returns on oil companies stock prices and their determinants

The identification of the forces that drive stock returns and the dynamics of their associated volatilities is a major concern in empirical economics and finance. This analysis is extremely important for determining optimal hedging strategies. This paper investigates the stock prices’ returns and their financial risk factors for several integrated oil companies, namely Bp (BP), Chevron-Texaco (CVX), Eni (ENI), Exxon-Mobil (XOM), Royal Dutch (RD) and Total-Fina Elf (TFE). We measure the actual co-risk in stock returns and their determinants “within” and “between” the different oil companies, using multivariate cointegration techniques in modelling the conditional mean, as well as multivariate GARCH models for the conditional variances. The distinguishing features of this paper are: (i) focus on the determinants of the market value of each company using the cointegrated VAR/VECM methodology; (ii) specification of the conditional variances of VECM residuals with the Constant Conditional Correlation (CCC) multivariate GARCH model of Bollerslev [(1990) Review of Economics and Statistics 72:498–505] and the Dynamic Conditional Correlation (DCC) multivariate GARCH model of Engle [(2002) Journal of Business and Economic Statistics 20:339–350]; (iii) discussion of the performance of optimal hedge ratios calculated with the DCC estimates. The “within” and “between” DCC indicate time-varying interdependence between stock return volatilities and their determinants. Moreover, DCC models are shown to produce more accurate hedging strategies.     

Exchange rates of oil exporting countries and global oil price shocks: a nonlinear smooth-transition approach

This paper models logistic and exponential smooth transition adjustments of real exchange rates for six major oil-exporting countries in response to different shocks affecting oil prices. The logistic form captures asymmetric and the exponential form symmetric adjustments in regards to positive and negative oil price shocks. We chose oil-exporting countries that do not peg their exchange rates. For most countries, we detect no statistically significant non-linearities for the adjustment process of real exchange rate returns, be they asymmetric or symmetric, in response to oil supply shocks, idiosyncratic oil-market-specific shocks, and speculative oil-market shocks. Exceptions are oil supply shocks in the UK and possibly Brazil, where exchange rates respond nonlinearly, though the effects are symmetric for both countries. On the other hand, global aggregate demand shocks, which are shocks not originating directly in the oil market, have nonlinear asymmetric effects on real exchange rate returns for Canada, Mexico, Norway and Russia, and nonlinear symmetric effects for Brazil and the UK.     

Fractional integration and cointegration in merger and acquisitions in the US petroleum industry

This article employs methodologies based on fractional integration and cointegration to analyse the time-series properties of merger and acquisitions (M&A) activity and crude oil prices in the US from 1980 to 2012. Our results indicate that an increase in the crude oil price produces a significant increase in the M&A data between 2 and 3 months after the initial shock.     

The monetary approach to exchange rates in the CEECs1

A panel dataset for six Central and Eastern European countries (Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia) is used to estimate the monetary exchange rate model with panel cointegration methods, including the Pooled Mean Group estimator, the Fully Modified Least Square estimator and the Dynamic Least Square estimator. The monetary model is able to convincingly explain the long‐run exchange rate relationships of a group of CEECs, particularly when this is supplemented by a Balassa–Samuelson effect. Our estimated long‐run monetary equations are used to compute equilibrium exchange rates. Finally, we discuss the implications for the accession of selected countries to the European Economic and Monetary Union.     

US stock market sensitivity to interest and inflation rates: a quantile regression approach

This article studies the sensitivity of the US stock market to nominal and real interest rates and inflation during the 2003–2013 period using quantile regression (QR). The empirical results show that the stock market has a significant sensitivity to changes in interest rates and inflation and finds differences across sectors and over time. Moreover, the effect of changes in both interest rates and inflation tends to be more pronounced during extreme market conditions, thus distinguishing expansion periods from recession periods.     

The relationship between stock prices and exchange rates in South Africa and Nigeria: structural breaks analysis

The relationship between stock prices and exchange rates has continued to generate interest from both the academia and financial industry players for many years. This study conducts an empirical investigation into the relationship between stock prices and exchange rates for the two largest economies in Sub-Saharan Africa – South Africa and Nigeria. Our methodology accounts for structural breaks in the data and the long-run relationship between stock and foreign exchange markets. The results of multivariate causality tests with structural breaks showed that causality runs from exchange rates to domestic stock prices in Nigeria (flow channel) while in South Africa, no causality exists between domestic stock prices and exchange rates. The results also reveal that there is causality from the London stock market to both countries’ stock markets, thus showing that international stock markets are driving both the Nigerian and South African stock markets.     

Stock returns and interest rates in China: the prequential approach

This article aims to study whether interest rates help to forecast stock returns in China using the prequential approach. A bivariate VAR model and a univariate autoregressive model are examined. Out-of-sample probability forecasts, generated based on both a bootstrap-like simulation method and a nonparametric kernel-based simulation method, are evaluated from both calibration (reliability) and sorting (resolution) perspectives. The results from calibration test indicate that including interest rates in the model improves the model’s ability to issue realistic probability forecasts of stock returns (be well-calibrated). Considering stock returns also enhances the prediction of interest rates with respect to calibration. Assessment through Brier score and Yates partition suggests that the model performs better in distinguishing stock returns that actually occur and stock returns that do not occur after incorporating the influence of interest rates. Overall, interest rates help in forecasting stock returns in China in terms of both calibration and sorting.     

A panel cointegration approach to the investment-saving correlation

This paper augments the empirical literature concerning the Feldstein-Horioka puzzle using non-stationary panel data. Recently developed tests for panel cointegration and panel unit root tests are employed. We find substantial evidence to support the hypothesis of no cointegration in this panel, implying a high degree of international capital mobility. Our results suggest that tests for cointegration in panel data provides a better methodological focus than the magnitude of saving-retention coefficients. First version received: August 1999/Final version accepted: December 2000