A Sequential Test for Structural Breaks in the Causal Linkages Between the G7 Short-Term Interest Rates

This paper investigates changes in the causal structure linking the G-7 short-term rates by using a sequential test for the constancy of the adjustment coefficients in error correction equations. This technique allows us to detect permanent structural breaks in the causal linkages. In this instance, the hypotheses of interest are the US world-wide leadership, the disengagement of UK monetary policy from those pursued in the Eurozone after the collapse of the ERM, and the German leadership hypothesis (GLH) within the European Union (EU). While we do not find any examples of reversal of causality, the evidence points to a break in the causal linkages between the UK and the German rates after the third/fourth quarter of 1992. The empirical results are also consistent with a US world-wide leadership and a weak German leadership within the Eurozone.     

Long memory and structural breaks in hyperinflation countries

In this paper we examine the stochastic behavior of prices in hyperinflation countries by using a fractional integration test (Robinson 1994) that lends itself to incorporating structural breaks into the model. We focus on Argentina, Brazil, and Israel and find that when allowing for structural breaks, in the form of slope dummies (or squared slope dummies), the order of integration of the series decreases considerably. Especially in the case of Brazil, the degree of persistence of inflation seems to be less substantial than estimated in other studies, which might be interpreted as evidence against “heterodox” inflation stabilization. (JEL C22, E31)