Market efficiency,purchasing power parity,and the official and parallel markets for foreign currency in Latin America

This paper examines the purchasing power parity (PPP) theory from a long-run perspective in the presence of a parallel or ‘black’ market for U.S. dollars in four Latin American countries, namely Argentina, Brazil, Chile, and Mexico, using monthly data for the recent float. Johansen's full information maximum likelihood multivariate cointegration technique is applied. Recent developments associated with this procedure are considered. First, a formal test developed by Johansen [Econometric Theory 8 (1992) 188, Econometric Theory 11 (1995) 25, Scand. J. Stat. 24 (1997) 433] for the presence of I(2) and I(1) components in a multivariate context is applied along with the estimation of the roots of the companion matrix for the correct determination of the cointegration rank. Second, given that two significant cointegration vectors were found for any country, structural restrictions identifying the long-run relations of interest are specified as proposed by Johansen and Juselius [J. Econometrics 63 (1994) 7] and Johansen [J. Econometrics 69 (1995) 111]. Thus, the joint structure of PPP and long-run informational market efficiency could not be rejected for all countries. Furthermore, estimation of the error correction terms shows that the black market rate adjusts to eliminate any deviation from long-run PPP. Finally, stability tests proposed by Hansen and Johansen [Hansen, H., & Johansen, S. (1993). Recursive estimation in cointegrated VAR-models. Working Paper, University of Copenhagen, Institute of Mathematical Statistics; Econometrics J. 2 (1999) 306] are applied and it is shown that the dimension of the cointegration space is sample dependent while the estimated coefficients do not exhibit instability in recursive estimations.     

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.     

Social security expenditure and GDP in OECD countries: A cointegrated panel analysis

Abstract

Using panel data unit root tests and panel cointegration tests, as well as estimation techniques appropriate for heterogeneous panels such as the full modified OLS, this paper re-examines the long-run co-movement and the causal relationship between GDP and social security expenditure in a bivariate model, employing data on 25 OECD countries from 1980 to 2001. Our cointegration test results show strong evidence in favour of the existence of a long-run equilibrium cointegrating relationship between GDP and social security expenditure after allowing for a heterogeneous country effect. Regarding the panel-based error correction model, we find that GDP and social security expenditure lack short-run causality, but reveal the existence of long-run bidirectional causality. This shows that, in the long run, economic growth must be based on a social welfare policy that should be carried out, and economic growth can facilitate contiguous development in a social welfare policy. Lastly, we also provide evidence to support that social security expenditure can affect growth through the savings and human capital accumulation in OECD countries.     

Revisiting residential demand for electricity in Greece: new evidence from the ARDL approach to cointegration analysis

This article re-examines the long-run and short-run determinants of the aggregate residential demand for electricity in Greece using data spanning the period 1964–2006 and the recently advanced ARDL cointegrating method (Pesaran, J Appl Econ 16:289–326, 2001) that has not been hitherto applied to Greek data. The results of the ARDL method combined with the (Johansen, J Econ Dyn Control 12:231–254, 1988) cointegration method show the presence of an equilibrium relationship among the variables involved. These findings may shed new light on the contemplation of more effective energy policies with respect to electricity.     

Long-Run Purchasing Power Parity and Structural Change: The Official and Parallel Foreign Exchange Markets For Dollars In Greece

This paper examines the Purchasing Power Parity theory from a long-run perspective in the presence of a parallel or 'black' market for US dollars in Greece using monthly data for the recent float. Johansen's FIML multivariate cointegration techniques is applied. Recent development associated with this procedure are considered. First, a formal test developed by Paruolo (1996) for the presence of I(2) and I(1) components in a ultivariate context is applied along with the estimation of the roots of the companion matrix for the correct determination of the cointegration rank. Second, given that two significant cointegration vectors were found, structural restrictions identifying the long-run relations of interest are specified as proposed by Johansen and Juselius (1994) and Johansen (1995b). Thus, the joint structure of PPP and long-run informational market efficiency could not be rejected. Furthermore, estimation of the error correction terms shows that the black market rate adjusts to eliminate any deviation from long-run PPP. Finally, stability tests proposed by Hansen and Johansen (1993) are applied and it is shown that the dimension of the cointegration space is simple dependent while the estimated coefficients do not exhibit instability in recursive estimations. [F31 F33]     

ON EXPORT-LED GROWTH IN AUSTRALIA AND CANADA: COINTEGRATION, CAUSALITY AND STRUCTURAL STABILITY*

This paper uses cointegration and vector-error correction (VEC) modelling to investigate whether the export-led growth hypothesis applies to Australian and Canadian exports and labour productivity. The Johansen (1988) procedure is used to test whether manufacturing and aggregate measures of exports and labour productivity are cointegrated. Exports and labour productivity are found to be cointegrated, suggesting the export-led growth hypothesis holds for the small, open Australian and Canadian economies, although the estimated cointegrating vectors suggest the relationship is of small order. The tests suggested in Hansesn (1992), for parameter stability in relationships with I(1) variables, are estimated to examine if the parameters estimated from the Johansen procedure are unstable and whether the null of cointegration can be rejected in favour of structural change. No evidence is found of parameter instability in either the Australian or Canadian long-run relationships at conventional significance levels. Estimation of VEC models suggests that exports are seen to cause productivity growth, although the quantitative impacts are again small. The reverse causality is rejected for both countries, except for the Canadian manufacturing sector for which there is a small, significant positive effect of labour productivity on manufactured exports.     

Do remittances and foreign aid augment the gross savings: Bangladesh,India and Philippines perspective?

Savings is considered to be a principal determinant to achieve long-run economic growth. Remittances and foreign aid are two important foreign capital inflows to meet the savings deficiency of developing nations. The objective of this study is to investigate the long-run impact of remittance to stimulate savings in remittance recipient countries. This paper contributes to the macroeconomic impact of remittance through a comparative study on Bangladesh, India and Philippines that positioned among the top ten largest remittance recipient countries from 2008 and onwards. The analysis makes use of an annual time series data over the period of 1980–2015. The Johansen cointegration test suggested long-run cointegrating relationship of remittance and foreign aid on gross savings. The test result suggests positive effect of remittances on gross savings for Bangladesh and Philippines although an insignificant negative effect for India. However, foreign aid has significant negative long-run impact in all the three cases. Government policy should focus on leveraging remittance flows to facilitate savings and investment for capital accumulation.     

Short-run and long-run dynamic linkages among international stock markets

This paper investigates the dynamic linkages among the U.S., Japan, U.K. and German stock market indices using daily data for the April 1, 1984 to May 31,91 period. In contrast to previous studies, a vector error correction model of cointegrated variables as developed by Johansen (1988, 1991) and Johansen and Juselius (1990) is employed to examine both short-run and long-run intermarket relationships among these four stock markets. Significant evidence is found in support of both short-run and long-run relationships among these four stock market indices. The U.S. stock market leads other stock markets in short-run in the pre and post October 1987 crash, but leads all other markets in the long-run in all periods examined. The presence of a one long-run cointegrating equilibrium relationship among the four stock market indices implies a limited role of international diversification for investors with long holding periods. However, because the US-Japan-Germany stock market indices, and Japan-UK-Germany indices are not cointegrated with each other, these indices may yield international portfolio diversification in the long-run. Finally, the conflicting results from multivariate cointegration tests found in this study can not be used to provide conclusive evidence on international stock market efficiency.     

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.     

Saving,investment and capital mobility in EU member countries: a panel data analysis of the Feldstein–Horioka puzzle

ABSTRACT

In this paper, we reexamine the long-standing and puzzling correlation between national saving and investment in 14 European Union (EU) countries. We employ a panel data set for the period 1970–2015 and we apply recently developed maximum likelihood panel cointegration methodologies. We find that there exists a long-run relationship between savings and investment for this panel of EU member countries, with the savings retention coefficient being low in magnitude but statistically different than zero. Therefore, we argue that there is weak evidence in favour of the Feldstein–Horioka puzzle and that the long-run international solvency condition is maintained in most of these countries. This evidence implies a moderate degree of capital mobility which is consistent with the macroeconomic experience of these countries during the period under investigation.     

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.     

The empirical study on price discovery of cornstarch futures market in China

This article aims at exploring the performance of the price discovery function of cornstarch futures market in China. In order to test the stationarity of the cash and futures prices of cornstarch, the augmented Dickey–Fuller test is applied. Both prices are integrated of order one. Then, the Johansen cointegration test is conducted to test the cointegrating relationship between those two prices. Finally, the Granger causality test is performed to observe the direction of causality. The evidence shows that there is a long-run relationship between cash and futures prices and the futures price Granger causes cash price. As a whole, price discovery of cornstarch market in China is present although it is a newly emerged market.     

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.     

Two further aspects of some new tests for structural stability

This paper presents two extensions to Hall and Sen’s [Hall, A.R. and Sen, A. 1999. Structural stability testing in models estimated via generalized method of moments. J. Bus. Econ. Stat., 17, 335–348.] analysis of their structural stability tests. First, we approximate the p-values for the non-standard asymptotic null distribution for the structural stability test statistics proposed by Hall and Sen (1999). The p-value response surfaces are approximated by a parametric function using the methodology proposed by Hansen [Hansen, B.E., 1997. Approximate asymptotic P-values for structural change tests. J. Bus. Econ. Stat, 15, 60–67.] Second, we show how Hall and Sen’s (1999) testing methodology can be used to diagnose the source of instability in Euler equation models. To illustrate this issue, we examine the stability of the dividend capital asset pricing model proposed by Hagiwara and Herce [Hagiwara, M. and Herce M.A., 1997. Risk aversion and stock price sensitivity to dividends. Am. Econ. Rev. 87, 738–745]. Hagiwara and Herce (1997) estimate the model using annual data from 1889–1994 and find the model is not rejected using the over-identifying restrictions test. Using the same data, we find some evidence of structural instability in the model. Interestingly, the tests reveal that the model appears to be correctly specified for the period up until 1942 but incorrectly specified in the post 1942 part of the sample.     

Real Money Demand,Income, and Interest Rates in Senegal: Is there a Long-Run Stable Relation?

In this paper, I examine the stability of the long-run relationship between real money demand, income, and interest rates in Senegal. Using advances in unit root and co-integration, I test for co-integration between M1 velocity, output, and the interest rate. By virtue of the fixed exchange rate regime, I used both the three months French Treasury bill and the deposit rate to proxy the opportunity cost of holding money. I used Stock and Watson (1993) DOLS in addition to an ECM. Quarterly data ranging from 1970:Q4 to 2006:Q4 is used in the analysis, and the results reveal evidence of co-integration between real money demand, income, and the interest rate. For this study, I used both an ECM co-integration test and Johansen (Journal of Economic Dynamics and Control 12(2/3), 231-254, 1988) co-integration method.     

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.     

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.     

Long-run relations between private and public sector wages in Sweden

Using a maximum likelihood cointegration approach we find two long-run relationships between central government, local government, and private sector wages in Sweden. This means that there is one common trend for the three sectoral wages. Private sector wages are weakly exogenous for the estimation of the long-run relationships. This suggests that the private sector is the wage leader. Testing linear restrictions on the estimated cointegrating space, we reject stationarity for the three relative wages using likelihood ratio-tests. The hypotheses of homogeneity for the two cointegrating vectors, i.e., that wages do not diverge in the long run, is also rejected.     

Determinants of sovereign bond yield spreads in the EMU: An optimal currency area perspective

In the light of the recent financial crisis, we take a panel cointegration approach that allows for structural breaks to the analysis of the determinants of sovereign bond yield spreads in nine economies of the European Monetary Union. We find evidence for a level break in the cointegrating relationship. Moreover, results show that (i) fiscal imbalances – namely expected government debt-to-GDP differentials – are the main long-run drivers of sovereign spreads; (ii) liquidity risks and cumulated inflation differentials have non-negligible weights; but (iii) all conclusions are ultimately connected to whether or not the sample of countries is composed of members of an Optimal Currency Area (OCA). In particular, we establish (i) that results are overall driven by those countries not passing the OCA test; and (ii) that investors closely monitor and severely punish the deterioration of expected debt positions of those economies exhibiting significant gaps in competitiveness.