The cointegration relationships among G-7 foreign exchange rates

A search method is applied to foreign exchange rates of G-7 countries, in terms of the US dollar, to estimate cointegration relationships. The method searches numerically, by strictly following the definition of the cointegration, a particular linear combination of nonstationary series in order to make it a stationary series. The list of those exchange rates which are cointegrated from the new method is very different from those derived from the conventional maximum likelihood estimation or ordinary least squares methods. The new method also provides confidence intervals for cointegration coefficients. From the confidence intervals, it is determined that certain G-7 currencies expressed in terms of the mark or the pound become stationary.     

The Transmission of International Shocks: A Factor-Augmented VAR Approach

The empirical literature on the transmission of international shocks is based on small -scale VARs. In this paper, we use a large panel of data for 17 industrialized countries to investigate the international transmission mechanism, and revisit the anomalies that arise in the empirical literature. We propose a factor augmented VAR (FAVAR) that extends the model in Bernanke, Boivin, and Eliasz (2005) to the open economy. The main results can be summarized as follows. First, the dynamic effects on the UK economy of an unanticipated fall of short-term interest rates in the rest of the world are: real house price inflation, investment, GDP and consumption growth peak after 1 year, wages peak after 2 years, and CPI and GDP deflator inflation peak during the third year. Second, a positive international supply shock makes the distribution of the components of the UK consumption deflator negatively skewed. Third, in response to a domestic monetary shock, we find little evidence of the exchange rate and liquidity puzzles and little evidence of the forward discount and price anomalies.     

International transmission of inflation under alternative exchange rate regimes: Empirical evidence and its implications

This is a study of the transmission pattern of inflation under alternative exchange rate regimes, fixed and flexible, among the Group of Seven (G-7) countries and their subsets, including four members of the European Union (EU) and two countries from North America. Our key empirical findings are as follows. The price levels of several countries that we found move together as a cointegrated system, forming an equilibrium relationship under both fixed and flexible exchange regimes. Second, the speed of adjustment estimates show that the transmission of inflationary disturbances across countries is less pronounced under the flexible exchange rate regime than under the fixed exchange rate regime. Third, the US was found to be the main producer of inflationary innovations among G-7 countries, whereas the UK was found to be the main producer of inflationary innovations among the EU countries, regardless of exchange rate regime.     

Monetary policy transmission,interest rate rules and inflation targeting in three transition countries

In 1991, the rate of inflation in the Czech Republic, Hungary and Poland was 57%, 35% and 70%. At the end of 2001, it was everywhere below 8%. We set up a small structural macro model of these three economies to account for the process of disinflation. We show that a simple macro model, with forward-looking inflation and exchange rate expectations, can adequately characterize the relationship between the output gap, inflation, the real interest rate and the exchange rate during this period. This model allows us to assess the relative importance of the interest rate and exchange rate channels in determining the path of disinflation.     

Extreme risk spillovers from commodity indexes to sovereign CDS spreads of commodity dependent countries: A VAR quantile analysis

Given the financialization of commodities and the increase in the CDS markets' size and structure, we examine the co-movement and dependence structure between four commodity indexes and sovereign credit risk via an extreme volatility risk spillover methodology. We use the daily change in sovereign CDS data between October 1, 2010 to March 31, 2020 for ten commodity-dependent countries and four commodity indexes (agricultural, precious and industrial metals, and energy). The results of White et al.'s (2015) VAR for Value at Risk (VaR) and the pseudo quantile impulse response function (QIRF) show that the volatility of the primary commodity export category (e.g., agriculture, mineral, and energy) substantially influences the volatility of sovereign spreads (except for two agriculture-dependent exporters). Still, it does not always have the strongest risk spillover effect when other commodity indixes are included in the analysis. When drilling down on the data and examining the single commodity index (i.e., gold, corn, etc.), our results indicate that the primary commodity exports significantly influence the volatility of its sovereign CDS spreads. Based on the results of the QIRF, most shocks are absorbed within 30 days. Most risk spillover from the volatility of sovereign CDS spreads to the volatility of commodity indexes is found to be insignificant.     

The intertemporal risk-Return relation,investor behavior,and technical trading profits: evidence from the G-7 countries

The intertemporal risk-return relation and investor behavior are both important pricing factors that jointly determine the expected market risk premium. Using the price adjustment process as a control variable, we find that the intertemporal risk-return relation is positive conditional on bad market news, but is non-positive conditional on good market news. This implies that good (bad) market news weakens (strengthens) the positive risk-return relation. The pattern in the distortion of the risk-return relation is consistent with short-term mispricing in which investors overvalue (undervalue) the stock market in reaction to good (bad) market news. We also show that ignoring the price adjustment process in the estimation of the risk-return relation leads to model misspecification and induces an upward (downward) bias in estimates of the relative risk aversion parameter conditional on good (bad) news. Our model of the asymmetric risk-return relation along with the price adjustment process is capable of generating the return dynamics that is attributable to technical trading profits. We suggest that the profitability of technical trading rules is not a violation of market efficiency, but a consequence of trading rules exploiting the asymmetric effect of price changes on the risk-return relation, along with the persistence property of price changes.     

A positive analysis of deposit insurance provision: Regulatory competition among European Union countries

We consider the provision of deposit insurance as the outcome of a non-cooperative policy game between nations. Nations compete for deposits in order to protect their banking systems from the destabilizing impact of potential capital flight. Policies are chosen to attract depositors who optimally respond to the expected return to deposits, which depends on deposit insurance levels, systemic risk and transaction costs. We identify both defensive and beggar-thy-neighbour policies. The model sheds light on the European banking crisis of 2008 in which individual nations ratcheted up their deposit insurance levels.     

Oil price shocks and their transmission mechanism in an oil-exporting economy: A VAR analysis informed by a DSGE model

This paper examines the macroeconomic effects of oil price shocks and the oil shock transmission mechanism in an oil-exporting country, Canada. We use a structural VAR with sign restrictions that comes from a two-country dynamic stochastic general equilibrium (DSGE) model to jointly identify oil price, domestic supply and U.S. and domestic monetary policy shocks. This identification strategy not only controls for reverse causality from the Canadian and U.S. macroeconomic conditions to the real oil prices, but more importantly, it also allows for contemporaneous interactions between the Canadian and U.S. variables. We find that oil shocks have a stimulative effect on Canadian aggregate demand, appreciate the Canadian dollar, improve the terms of trade and reduce real wages. Foreign disturbances, including innovations in oil prices and the U.S. interest rate, have a significant influence on Canadian economic activities. Our counterfactual analysis indicates that the reaction of the U.S. interest rate as an indirect transmission channel for oil price shocks plays a moderate role in explaining the real exchange rate and inflation, but has negligible impacts on the Canadian output and interest rate.     

A cos-benefit analysis of accounting for inflation

This research develops a methodology to assess the net social benefits associated with three alternative measurement models: general price-level adjusted historical cost (GPLA), current cost (CC), and current cost general price-level adjusted (CC-GPLA). Net benefits were estimated in six basic steps: 1) computer programs were used to restate historical cost financial information covering 16 years for 21 companies for specific and general price-level changes; 2) three multiple regression models were developed for each company and each measurement model that were used to develop forecasts of the societal rate of return (income before deducting interest and income taxes divided by total assets net of accumulated depreciation, depletion, and amortization) for each year of a three-year test period; 3) the total societal resources available to each industry were allocated to the companies with forecasted average rates of return in the higher percentiles of the distribution of rates of return as measured by each mode; 4) gross benefits were estimated by comparing the total societal income (using CC-GPLA as a surrogate) under GPLA, CC, and CC-GPLA with the total societal income under the historical cost model; 5) estimated costs of applying each model were obtained by surveying company executives; 6) net benefits of each measurement model were estimated by discounting the differences between estimated gross benefits and the estimated costs. The results indicated that the CC-GPLA model almost always was superior to GPLA and CC. The CC model was inferior to GPLA for the chemical industry, but whether it was inferior for the steel industry depended on the assumptions made.     

Forecasting inflation in the European Monetary Union: A disaggregated approach by countries and by sectors

Inflation in the European Monetary Union is measured by the Harmonized Indices of Consumer Prices (HICP) and it can be analysed by breaking down the aggregate index in two different ways. One refers to the breakdown into price indexes corresponding to big groups of markets throughout the European countries and another considers the HICP by countries. Both disaggregations are of interest because in each one, the component prices are not fully cointegrated, having more than one common factor in their trends. The paper shows that the breakdown by group of markets improves the European inflation forecasts and constitutes a framework in which general and specific indicators can be introduced for further improvements.     

对货币供应，产出缺口在通胀传导中机制的研究

随着经济全球化和金融市场日益发达,通胀的形成和传导机制发生了较大变化,即使存在较大产出缺口,宽松货币政策引发的通胀预期还是会推升上游初级产品价格,并迅速向下游传导。但该文认为,总需求仍是影响通货膨胀的重要因素。一方面,货币乘数顺周期内生,风险溢价逆周期内生,总需求低迷会抑制货币扩张的程度;另一方面,货币对需求的刺激程度也具有顺周期特性,总需求低迷时,即使成功扩张了货币,其对总需求的刺激作用也打了折扣;不仅如此,通胀预期虽然会推高国际大宗商品价格和资产价格,但只要货币政策保持稳定,这两种价格能否持续上涨终究还是取决于总需求。     

The transmission of inflation in a small economy: an empirical analysis of the influence of US monetary disturbances on Canadian inflation, 1962–1980

The paper examines the transmission of inflation in Canada during 1962–1980 using an empirical methodology which is very flexible in determining the direction of casuality and the shape of distributed lag effects. The paper finds that US monetary growth exerted an important effect on Canadian inflation during both fixed and flexible exchange-rate periods. The evidence also shows that Canadian monetary growth has remained linked to US monetary growth under the present flexible exchange-rate regime.     

International capital structure differences among the G7 nations: a current empirical view

Historical research domestically and internationally suggests that differences in capital structures exist for industry classification, firm size and nationality. However, the data for most of these previous studies are based on book values, include a limited number of countries, are not up-to-date, and specifically do not cover the period of the late 1980s when there were important developments in the globalization of financial markets. In addition, no single study specifically compares all seven of the world's major industrial nations (G7 Nations). Financial theory would suggest that in an efficient global market the capital structure of identical firms in different nations would be the same. If international market imperfections still exist through the 1980s, current capital structures and costs may be different among similar firms in different nations; and business advantages (or disadvantages) may provide profits (or costs) to firms incorporated in different countries. The intent of this research is empirically to update the literature with recent international data on both a book value and market value basis and to include for the first time in a single study all the G7 Nations. The results suggest significant financial structure differences still exist among the G7 countries. Specifically, on a market value basis France, Italy and Germany tend to use a higher proportion of total debt, US, UK, Canada and Japan tend to use less debt, and France, Italy and Canada tend to use a higher proportion of institutional debt (non-spontaneous funds) than the US, UK, Japan and Germany.     

The cost of deviating from the optimal monetary policy: A panel VAR analysis

Exploiting the panel VAR GMM estimator's features, macroeconomic country factors are combined with micro-economic bank data to test for the risk taking channel in the Euro Area. According to prior expectations based on an extended DSGE model, the analysis demonstrates that the monetary policy incentives bank risk taking by increasing the bank leverage, but it is not able to influence the level of credit risk. However, deeper investigations indicates the Taylor gap adds to the bank risk appetite in all its forms, while regarding the reactions to target variables, movements in the interest rate smooth the bank risk.     

Does inflation targeting really make a difference? Evaluating the treatment effect of inflation targeting in seven industrial countries

We evaluate the treatment effect of inflation targeting in seven industrial countries that adopted this policy in the 1990s. To address the self-selection problem of policy adoption, we make use of a variety of propensity score matching methods recently developed in the treatment effect literature. Our results show that inflation targeting has no significant effects on either inflation or inflation variability in these seven countries. Further evidence from long-term nominal interest rates and income velocity of money also supports the window-dressing view of inflation targeting.     

Responses of REITs index and commercial property prices to economic uncertainties: A VAR analysis

We use market participants’ perceived uncertainty to investigate the response of real estate investment trusts index (REITs Index) and commercial property prices to shocks in economic uncertainty. Using US quarterly data and applying a vector autoregression (VAR) model, our results show that an increase in market participants’ perceived uncertainty leads to a significant drop in the REITs Index and commercial property prices. In addition, we show that the REITs Index responds quicker to the uncertainty shocks than the commercial property prices. Our findings provide important implications for investors.