Current account sustainability in Latin America

This paper examines the sustainability of the current account deficit in eighteen Latin American countries through the analysis of the stationarity properties of the current account balance. First, we apply traditional unit root tests and consider the possibility of structural breaks. Second, since the current account may have a nonlinear behaviour, we test for linearity in the data and analyse current account stationarity by means of a recently developed nonlinear unit root test. Results from linear and nonlinear unit root tests show that current account sustainability is supported for the majority of Latin American countries with the exception of Argentina, Brazil, Chile and Paraguay. For the Dominican Republic, Honduras, Mexico, Panama, Peru, Uruguay and Venezuela the current account dynamics are best described by a stationary linear model, and by a stationary linear model with a mean shift in years 2003, 1982 and 1980 in Bolivia, Costa Rica and Nicaragua, respectively. In the case of Colombia, Ecuador, El Salvador and Guatemala, results show that the current account is best described by a mean-reverting nonlinear process.     

Assessing the sustainability of external imbalances in the European Union

We assess the sustainability of the current account (CA) balance, net international investment position (NIIP) and net external debt (NED) in a sample of 22 EU countries using two complementary approaches. First, we employ time‐series stationarity tests of current account balance‐to‐GDP ratios as well as cointegration tests of exports and imports of goods and services. Second, we assess the level of trade balance that stabilises the NIIP and the NED. We find that there is sustainability of the CA balance in eight countries, NIIP in five countries and NED in 10 countries, whereas there is evidence of a lack of sustainability in five debtor nations and three creditor nations. Both approaches are consistent with each other given the relationship between flows and stocks, the existence of structural breaks, and valuation effects via exchange rate and interest rate changes.     

Smooth breaks and nonlinear mean reversion in real interest parity: Evidence from East Asian countries

This study aims to explore the empirical validity of the real interest rate parity (RIP) hypothesis for East Asian countries using Japan as the base country. To this end, we employ the recently proposed unit root tests of Christopoulos and Leon-Ledesma that account for both multiple smooth structural breaks of unknown form and nonlinear mean reversion in the series. Our empirical results uncover overwhelming evidences in favor of the RIP hypothesis for the whole countries in our sample. More specifically, through a Fourier approximation, it is observed that all real interest rate differentials display a mean-reverting behavior around an infrequently smooth-breaking mean, with the breaks being in accordance with the financial reforms and economic crises witnessed by the countries. Moreover, the degree of mean reversion appears to vary nonlinearly with the size of real interest rate appreciations and depreciations.     

The hypothesis of a unit root in OECD inflation revisited

This paper investigates the hypothesis of a unit root in inflation for 13 OECD countries over the period 1957–2005, taking into account cross-sectional dependence and multiple mean shifts. We conduct unit root testing with the more powerful unit root tests with cross-dependence proposed by Smith et al. [Smith, L. V., Leybourne, S., Kim, T., & Newbold, P. (2004). More powerful panel data unit root tests with an application to the mean reversion in real exchange rates. Journal of Applied Econometrics, 19(2), 147–170] and a bootstrap version of the panel stationarity test of Hadri [Hadri, K. (2000). Testing for stationarity in heterogeneous panel data. The Econometrics Journal, 3(2), 148–161.], which provide inconclusive evidence on the time series properties of OECD inflation rates. To shed some light on this issue, we employ the recently developed panel stationarity test of Carrión-i-Silvestre et al. [Carrión-i-Silvestre, J. L., Del Barrio, T., & López-Bazo, E. (2005). Breaking the panels: An application to the GDP per capita. The Econometrics Journal, 8(2), 159–175] that assumes a highly flexible trend function by incorporating an unknown number of breaks in level. Overall, our confirmatory analysis renders clear-cut evidence in favor of regime-wise stationarity. Furthermore, the breaks in inflation detected are closely associated with macroeconomic shocks and changes in monetary policy.     

财政规模、经济增长与结构变化基于异期协变模型的经验证据(1952-2007)

本文运用我国1952-2007年财政规模与人均实际GDP数据进行实证分析,发现我国财政规模在1970年和1999年,人均实际GDP在1962年和1992年发生结构突变,两个序列都是含有两次结构突变的趋势平稳过程,而非单位根过程,在此基础上建立了异期协变模型,发现我国财政规模和经济增长之间具有长期动态均衡关系,政策含义是按照现有经济和人口增长水平,我国财政规模在未来还能够持续增长。     

The Feldstein–Horioka puzzle in South Africa: A fractional cointegration approach

The Feldstein–Horioka (FH) puzzle, that is the strong correlation between saving and investment in a world where obstacles to capital mobility are limited, has been studied extensively since it was exposed in 1980. Even though the theoretical and empirical literature has examined many of its potential causes, the puzzle persists. This paper aims at shedding further light on the issue by investigating the relationship between saving and investment in South Africa since 1946 using fractional integration and cointegration techniques to account for high persistence in the series. We find evidence of fractional cointegration between saving and investment, indicating some degree of persistence in the gap between the two variables. We also find a structural break in saving and investment ratios to GDP around 1980, which roughly coincides with the start of a financial deregulation process in South Africa. While fractional cointegration holds before the break, it does not thereafter. In other words, while the FH puzzle is observed before the start of financial deregulation, it subsequently disappears. This suggests that financial deregulation may have loosened the link between saving and investment.     

The Evolution of the Credit‐to‐GDP Ratio: An Empirical Analysis

We assess the persistence of the credit‐to‐GDP ratio over more than 130 years of data for 11 advanced economies, employing an approach based on fractional integration and allowing for nonlinearities. We show how the time series properties of the data changed around World War II (WWII). Moreover, our findings are consistent with the idea that the supply of mortgage loans has been particularly strong since WWII, in the sense that the degree of integration of the leverage ratio obtained with only these loans is larger than that of the ratio obtained with the total loans for almost all the studied countries. Nevertheless, it is generally the case that both types of ratios show a higher degree of integration after WWII than before it, though often insignificantly, and that their time trends are significant only after WWII.     

MARKET REFORM AND FOREIGN DIRECT INVESTMENT IN LATIN AMERICA: Evidence from an Error Correction Model

This study models dollar values of foreign direct investment (FDI) inflows to conditions in seven Latin American countries (Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela) during the 1988-1992 period. Although much research on FDI has used time series data to explain inward or outward flows, two things set this study apart. First, this study includes market reforms as independent variables. Second, this study uses newer time series econometric tools (unit root test and cointegration analysis) to correct for a spurious regression. Our model is robust, explaining 79.4 percent of variation. We found three independent variables (size of current account deficit, size of GDP, and value of privatization less FDI in privatized companies) to be significant. Although we found directional support for three other independent variables (degree of capital market liberalization, low inflation rate, and depreciation of the real exchange rate), none of these proved significant.     

The effects of structural breaks and long memory on currency hedging

Empirical evidence suggests that unconditional variance of exchange rate return series is subject to occasional structural breaks that may induce spurious phenomenon of high persistence and long memory of volatility processes. In this study, we investigate the effects of such breaks on estimated risk-minimizing hedge strategies (ratios) and their performance in currency markets. Using bivariate GARCH (BGARCH) and fractionally integrated GARCH models, we estimate the hedge ratios for six foreign currencies in the full sample with and without controlling for breaks and each subsample of different unconditional variance regimes identified by a modified version of the Inclan C, and Tiao GC (1994) algorithm. Our findings suggest that daily currency risk can be better hedged with currency futures when controlling for unconditional variance breaks in the BGARCH model. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:607–632, 2010     

Testing the Martingale Difference Hypothesis (MDH) with Structural Breaks: Evidence from Foreign Exchanges of Nigeria and South Africa

ABSTRACT

This study tests for MDH in two prominent foreign exchange (FX) markets in Africa, Nigeria and South Africa using three benchmark currencies (euro, dollar and pound sterling). Data utilized cover time series closing rate data set of five-day weekly frequency spanning December 14, 2001 to September 26, 2014. The study considers both the linear and nonlinear measures for MDH with better size and power properties. We also capture structural break endogenously from the data stream using Perron (2006) unit root test with structural break. Three striking findings are discernible from our analyses. First, on average, the South African FX market appears to be more efficient than the Nigerian FX market. Thus, the latter may be more susceptible to speculations than the former. Second, ignoring significant structural breaks may render statistical inferences invalid. Third, the choice of methodology does matter when testing for MDH of foreign exchanges in Africa.     

Current account sustainability in advanced economies

This paper investigates the sustainability of current accounts in advanced economies using a panel of 27 countries and annual data over the 1980–2008 period. Relying on various panel unit root tests and a sequential panel selection method, we find strong evidence in favour of nonlinear but stationary current account trajectories only for 7 countries, while the remaining 20 appear to be non-stationary and thus unsustainable. Our analysis indicates that careful empirical modelling of current account dynamics, particularly in relation to cross-section dependence and nonlinear behaviour, is crucial for appropriate economic policy-making.     

Current account and relative prices: Are there any cointegration relationships in the presence of structural breaks in emerging economies?

The aim of this study is to examine the long-run relationship between the current account and relative prices, such as terms of trade (TOT) and real exchange rate, for the emerging economies. These variables have been exposed to large fluctuations for more than two decades in all emerging economies; therefore, structural breaks have to be taken into account in all estimations. In this article, various methodological techniques have been used to examine this long-run relationship (with and without the structural breaks). Two important results have emerged, first; when the structural changes are excluded there is a strong evidence for long-run relationship between current account and relative prices. Second; when the structural breaks are included, variables are found to be stationary. Hence, depending on the stability of the variables, the validity of the cointegration relationship has been seriously questioned. This study illustrates that the test results proving non-stationary of the series and the presence of cointegration may be spurious if there is any possibility of instability.     

Capital Flows and Economic Growth in Ghana

ABSTRACT

The study examines the differential effects of capital flows on economic growth in Ghana over the period 1970–2014 using autoregressive distributed lag (ARDL). Breakpoint unit root tests are employed to cater for structural change and breaks in time series. Afterwards, these break dates are fed into the ADRL model as dummy variables to allow for the computation of a more robust cointegrating vector. The findings indicate that in both the short and long run capital flows (i.e. FDI, aid, and external debt) have negative effects on economic growth. However, remittances exhibit positive insignificant elasticity in all the regressions. Further, the empirical results show that while the impact of trade, gross capital formation and population growth on growth are mixed, that of inflation is negative. The results of the study are consistent with the idea that the impact of capital flows in Africa has been exaggerated.     

中国通货膨胀持续性的非对称特征研究--基于分位数自回归模型和分位数单位根的研究

基于1990－2013年中国月度CPI数据,本文通过运用分位数自回归模型和分位数单位根检验方法,研究了中国通货膨胀惯性的非对称特征,并分析了不同分位点上的通货膨胀惯性系数、单位根检验结果和半衰期。结果发现：中国的通货膨胀持续期存在明显的非对称特征,1998年之后通货膨胀持续性要显著低于1998年之前;相比于高通货膨胀水平,低通货膨胀水平上的通货膨胀持续性要显著降低。     

Heterogeneous effects of competitiveness shocks on macroeconomic performance across euro area countries

This paper considers how competitiveness impacts macroeconomic performance in 11 euro area countries. VAR models are estimated for the individual countries using quarterly data from 1995Q4 to 2013Q4. Besides unit labour costs as a competitiveness measure, the models include GDP, the current account balance and domestic credit. The empirical analyses show that changes in unit labour costs help explain GDP dynamics in the short and medium term in most countries, whereas they have little explanatory power for the current account balance or domestic credit for most countries. Overall, the effects of the unit labour costs vary substantially across the countries in the euro area. The heterogeneity suggests that policy measures aiming to improve economic growth, correct current account imbalances and ensure financial stability need to take country‐specific features into account.     

Trade Openness and Income: A Tale of Two Regions

In this paper, we present evidence of the long‐run effect of trade openness on income per worker for two regions that have followed different liberalisation strategies, namely Asia and Latin America. A model that re‐examines these questions is estimated for two panels of Asian and Latin American countries over the 1980–2008 period using a novel empirical approach that accounts for endogeneity as well as for the time series properties of the variables involved. From an econometric point of view, we apply recent panel co‐integration techniques based on factor models that account for two additional elements usually neglected in previous empirical literature: cross‐dependence and structural breaks. The results point to a positive impact of trade openness in both Asia and Latin America although the size is smaller in the second region. We associate this finding with the degree to which trade was managed in both regions of the developing world.     

Debt Relief and the Current Account: An Analysis of the HIPC Initiative

In this paper I develop a model to investigate the connection between debt relief and current account sustainability. This model can be used as a key input in assessing whether a HIPC country's real exchange rate is ‘overvalued,’ and will thus need to go through devaluation. The working of the model is illustrated for the case of Nicaragua, a country that in 2002 had one of the highest external debt to GDP ratios: almost 300 per cent. Nicaragua is the second poorest country in the Western Hemisphere (after Haiti), and for the last decade has relied very heavily on foreign assistance and aid. Moreover, in the last few years Nicaragua has run extremely large current account deficits in excess of 37 per cent of GDP during 1997‐2001 largely financed by grants, donations and migrant remittances.     

Investment in Transition Economies

Summary

All centrally planned economies suffered from overinvestment. Due to low capital productivity, reasonable growth rates in output could be maintained only with high investment/GDP ratios. Nevertheless, the sharp reduction in investment during transformational recession and its slow growth during subsequent recovery are viewed as negative phenomena, since transition economies offer numerous opportunities to increase output with relatively small targeted investment.

This paper seeks to develop and test two major hypotheses. The first one explains the behavior of aggregate investment during transition: we find that changes in external financing (current account balance), in the government budget deficit and in the institutional capacity of the state (as measured by the share of government revenues in GDP) explain up to 75% of the variations in investment/GDP ratios during transition, while the progress in reforms (cumulative liberalisation index) and in privatisation (share of the private sector in GDP) do not matter a great deal. With respect to sources of investment financing, there is some evidence that better investment performance is supported by budgetary funds, by credits to the private sector and by the strength of the stock market, whereas foreign aid is a substitute rather than a complement (i.e., it is negatively related to investment) and the inflow of foreign direct investment is not important.

The second hypothesis deals with the impact of investment on economic performance as measured by changes in GDP during transition: we find that differences in performance arc, in great part, associated not with investment patterns, but with varying marginal capital productivity. The latter in turn is determined mainly by differing magnitudes of restructuring required in various countries, i.e., by the distortions in industrial structure and trade patterns inherited from central planning, and by the institutional capacity of the state (as measured by the share of shadow economy and government revenues in GDP). The degree of liberalisation in this case appears to be a relatively important determinant of capital productivity, while the rates of inflation are not.     

On Modelling the Persistence of Profits in the Long Run: A Test of the Standard Model for 156 US Companies, 1950–99

‘Persistence of profits’ studies of competitiveness across samples of firms, and for individual firms, have almost always employed a simple first order autoregression model. Reservations over the use and interpretation of the AR1 in this context raise questions both over the reliability of previous results, and for future research strategy. We test the standard model on a common sample of 156 US companies over a 50 year period against a recently proposed, alternative model that adopts structural time series methods. A statistically significant degree of consistency is found between the two approaches in identifying firms persistently above or below the competitive norm in the long run. However, the structural time series method detects a much higher overall incidence of persistence, and appears to offer advantages in cases where the profit dynamics are more complex.     

带结构突变的面板数据单位根伪检验研究

文章利用Monte Carlo模拟方法研究了带结构突变的面板数据单位根伪检验问题。研究发现,只有在突变前后样本数相差较大,或者均值突变不明显时,均值突变才不会导致传统面板单位根检验结果失效;趋势突变在绝大多数情况下将导致传统的面板数据单位根检验失效。