The application of nonparametric tests to poverty targeting

Many otherwise successful social programs have limited outreach among the very poor. We show how a recently developed nonparametric test can detect this pattern of program participation. We apply the test to data on participation in a microcredit program in India and do find participation increasing in income among the poorest households in the region.     

Producer price adjustment to commodity price shocks: An application of threshold cointegration

During the 1980s and 1990s, most developing countries in Sub-Saharan Africa and Latin America implemented structural adjustment reforms, which included the liberalization of export crop markets and the abolition of marketing boards. The emergence of new marketing systems may have altered price transmission mechanisms, especially if collusion behaviors have appeared among domestic stakeholders along the marketing chain. I use threshold cointegration tools to analyze the dynamics of world price transmission to coffee growers in three deregulated markets. The methods I use allow me to test the presence of a threshold in both the cointegrating relationship and its corresponding error correction model. Over the pre-reform period, I detect asymmetric price adjustments that appear favorable to producers - deviations from the long-run equilibrium resulting from largest increases in world prices being eliminated relatively quickly - and disappear in the post-reform period. On the contrary over the post-reform period, the results suggest that largest decreases in world prices may be transmitted relatively quickly to growers. These results can be seen as expressions of a favorable pricing policy over the pre-reform period and an unfavorable influence of new private agents over the post-reform period, meaning that in some cases reforms may have failed to create competitive market structures.     

The PPP debate: Multiple breaks and cross-sectional dependence

This study implements panel unit root PPP tests accommodating level and trend breaks and cross-sectional dependence. In the presence of breaks there is evidence of a currency and price index effect. Additionally accounting for cross-sectional dependence overturns support for PPP.     

The Feldstein-Horioka puzzle in African countries: A panel cointegration analysis

This paper investigates the Feldstein-Horioka coefficients for 37 African countries using the recently developed Pooled Mean Group (PMG), Fully Modified OLS (FMOLS), and Dynamic OLS (DOLS) panel cointegration techniques. The empirical findings reported in this paper reveal that savings and investment are non-stationary and cointegrated series. The estimated coefficients using FMOLS, DOLS, and PMG are 0.38, 0.58, and 0.36, respectively, for the sample as a whole for the period from 1970 to 2006. These results confirm previous studies' findings that capital was relatively mobile in African countries compared to OECD countries. In addition, our study shows that there are marked differences in savings retention coefficients for different country groups in Africa (CFA franc zone and non-CFA franc zone countries, oil-producing and non-oil-producing countries, civil law and common law countries). These results have some policy implications.     

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%.     

Detection of switching cointegration rank allowing for switching lag structure: an application to money-demand function

This paper distinguishes three marital states: married; cohabiting; and single. It examines, applying the method of multinomial logit to data on men, aged 18–30, drawn from the Family Expenditure Survey for the UK, the extent to which their probabilities, of being in each of these states, is affected by their economic status and by their educational level. It concludes that being unemployed significantly reduces the chances of men being married.     

Revisiting purchasing power parity for East Asian countries using the rank test for nonlinear cointegration

This study applies a simple and powerful nonlinear rank test, proposed by Breitung (2001) to test the validity of long-run Purchasing Power Parity (PPP) in a sample of East Asian countries over the period March 1985–September 2008. The empirical results indicate that PPP holds for all of East Asian countries studied and the nominal exchange rate, domestic Consumer Price Index (CPI) and the US CPI are all linearly interrelated with the exception of China. Our results have important policy implications for these East Asian countries under study.     

Quantile nonlinear unit root test with covariates and an application to the PPP hypothesis

In this article, we employ the methods initiated by Hansen (1995) to develop new quantile nonlinear unit root tests with covariates. The limiting distributions of our proposed tests are derived, which are dependent on nuisance parameter reflecting the correlation between the equation error and the covariates. To deal with this inferential difficulty, two alternative procedures based on either consistent estimate of the nuisance parameter or bootstrap implementation of the test are proposed. Monte Carlo simulations show that the proposed tests perform very well in finite samples and large power gains can be achieved by including correlated covariates in the testing equation. The proposed tests are applied to the PPP hypothesis. The empirical results indicate that the real exchange rates are not constant unit root processes.     

Bayesian estimation of the output gap for a small open economy: The case of Canada

We introduce a novel approach for estimating output gaps for small open economies. Identification is based on a multivariate trend-cycle decomposition in which transitory exchange rate movements are linked to the output gap and inflation. The model is then applied to Canadian data.     

Long-run validity of purchasing power parity and rank tests for cointegration for Central Asian countries

This study finds that Purchasing Power Parity (PPP) holds in the long-run for Azerbaijan, Kazakhstan and Kyrgyzstan, based on Breitung's (2001 Breitung, J. 2001. Rank tests for nonlinear cointegration. Journal of Business and Economic Statistics, 19: 331–40. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar]) rank tests for cointegration. Results from further analysis indicates that nominal exchange rates and relative prices are nonlinearly interrelated. Trade barriers, transportation costs and government intervention in the pricing system in these countries may have resulted in the establishment of the above-mentioned nonlinear relationship.     

Testing for unemployment hysteresis in nonlinear heterogeneous panels: International evidence

Nonlinear behavior of unemployment is well documented in the literature, and thus linear unit root tests may not be appropriate in this case. This paper tests for hysteresis of unemployment for 29 OECD countries through the use of a new nonlinear panel unit root test developed by Ucar and Omay (2009). The test examines the joint null hypothesis of linearity and a unit root against the alternative hypothesis of nonlinear stationarity. Large power gains are achieved by both combining cross-sectional information with nonlinearities in the data. In addition, after the unit root null being rejected, we use a sequential panel selection method suggested by Chortareas and Kapetanios (2009) to classify the whole panel into a group of stationary countries and a group of non-stationary countries. The empirical findings show that the nonlinear panel test gives strong evidence in favor of the natural rate hypothesis of unemployment for 23 of 29 OECD countries, in contrast to those obtained by Chang's (2002) linear panel test that 17 countries display evidence of stationary unemployment.     

On the specification of granger-causality tests using the cointegration methodology

The application of Granger-causality tests to macroeconomic time series frequently necessitates filtering the data to induce stationarity. If the relevant variables are cointegrated, Granger-causality tests are misspecified if applied in standard vector autoregressive format to differenced data. A common application is illustrated.     

The Tobit cointegrated vector autoregressive model: An application to the currency market

The Tobit cointegrated vector autoregressive model proposed in this study extends the existing methodology by allowing the censored variable to be nonstationary. The approach requires deriving the distribution of the cointegration rank test and simulating new critical values. The empirical application refers to the currency market. It has confirmed that the exchange rate is driven by four main forces: inflation, terms of trade, the perception of the country-specific risk, and the state of the currency market. Temporary disequilibria in the currency market arise not only from the “fundamental” factors, but also from the contagion effect.     

Instability tests in cointegration relationships. An application to the term structure of interest rates

This paper tries to review, from a practitioner's point of view, the recent strand of literature on cointegration tests allowing for structural changes or parameter instability. Thus, we apply several tests using as an example the expectations model of the term structure of interest rates. The results are consistent with the existence of cointegration between the long and the short run Spanish interest rates, with a vector (1,−1), as predicted by the theory. However, there is also evidence of structural instability, mainly at the beginning of 1994, that can be attributed to the financial changes that occurred in Spain as a result of its external commitments in the process of the European Monetary Union.     

An analysis of the informational content of New Zealand data releases: The importance of business opinion surveys

We examine the informational content of New Zealand data releases using a parametric dynamic factor model estimated with unbalanced real-time panels of quarterly data. The data are categorised into 21 different release blocks, allowing us to make 21 different factor model forecasts each quarter. We compare three of these factor model forecasts for real GDP growth, CPI inflation, non-tradable CPI inflation, and tradable CPI inflation with three different real-time forecasts made by the Reserve Bank of New Zealand each quarter. We find that, at some horizons, the factor model produces forecasts of similar accuracy to the Reserve Bank's forecasts. Analysing the marginal value of each of the data releases reveals the importance of the business opinion survey data—the Quarterly Survey of Business Opinion and the National Bank's Business Outlook survey—in determining how factor model predictions, and the uncertainty around those predictions, evolve through each quarter.     

On the permanent effect of an aggregate demand shock: Evidence from the G-7 countries

This paper extends the work of Cover, Enders and Hueng (2006) to examine the idea that an aggregate demand shock may have permanent effect on the output level by indirectly shifting the aggregate supply curve. We utilize the bivariate SVAR modeling and adopt an identification scheme, which allows for the possibility that a shift in the aggregate demand curve may induce the long-run aggregate supply curve to shift. We have shown that aggregate supply shocks are positively affected by the demand shocks in each of the G-7 countries. It is found that a one-time positive aggregate demand shock increases the output level permanently in these industrialized economies. We have also shown that our decomposition strategy can help resolve anomalies in the responses of inflation to a positive aggregate supply shock observed in a simple Blanchard-Quah decomposition.     

The process followed by PPP data. On the properties of linearity tests

Recent research has reported the lack of correct size in stationarity test for PPP deviations within a linear framework. However, theoretically well motivated non-linear models, such as the ESTAR, appear to parsimoniously fit the PPP data and provide an explanation for the PPP ‘puzzle’. Employing Monte Carlo experiments the size and power of the non-linear tests are analysed against a variety of nonstationary hypotheses. Aslo the ESTAR model is fitted to data from high inflation economies. The results provide further support for ESTAR specification.     

Business cycle and level accounting: the case of Portugal

This paper studies what accounts for the recent business cycles phenomena in Portugal and why it is depressed relatively to the United States. The business accounting procedure applied here suggests that most of the changes in output per worker in Portugal over the period (mainly, from 1979 to 1991) can be attributed to changes in economic efficiency. For instance, the strong economic recovery in output per worker just after Portugal joined the European Union until the first years of the 1990s can be essentially attributed to improvements in economic efficiency. From 1979 to 2000, Portugal caught up with the industrial leader. Its output per worker is currently depressed by about 46% relative to the United States level (it was depressed by 57% in 1979). In the 1980s all of this depression in output per worker relative to the United States was due to the productivity factor. By 2000 Portugal depression relative to the United States was a mix of the French and Japanese depression. The labor factor accounted for roughly 24% of this depression, while the economic efficiency accounted by about 89%.      

On the Fisher information matrix of a vector ARMA process

We derive a neat and compact representation of the asymptotic Fisher information matrix of a vector ARMA process. Its inverse can be used immediately as the asymptotic covariance matrix of the Gaussian maximum likelihood estimator. We also provide the robust sandwich covariance estimator when the process is non-Gaussian.     

Consumer expectation and output growth: The case of China

This study shows that China’s Consumer Expectation Index contains useful information about pure expectation shocks, which are unrelated to economic fundamentals. It turns out that such shocks are likely to be an important independent driver of industrial output growth.