IDEAS home Printed from https://ideas.repec.org/a/taf/apeclt/v3y1996i6p365-368.html
   My bibliography  Save this article

US budget deficits, inflation and exchange rate: a cointegration approach

Author

Listed:
  • Matiur Rahman
  • Muhammed Mustafa
  • Eldon Bailey

Abstract

This paper applies the well-known cointegration approach to explore a possible long-run pairwise relationship between (i) US real budget deficits and real exchange rates, and (ii) US inflation rates and real exchange rates. The unit root test shows that each of the above time series is non-stationary in levels. It is also verified that stationarity can be induced in each series by the first differencing of the level data. The ADF test results indicate a lack of cointegration between the US real budget deficits and the real exchange rates at 1, 5 and 10% levels of significance. The same is also true for US inflation rates and real exchange rates. But these findings have been contradicted by those from the associated error-correction models at 5 and 10% levels of significance. The estimates of the error-correction models offer evidences to long-run/short-run unidirectional Granger causality from the real budget deficits to the real exchange rates, and from the real exchange rates to the inflation rates.

Suggested Citation

  • Matiur Rahman & Muhammed Mustafa & Eldon Bailey, 1996. "US budget deficits, inflation and exchange rate: a cointegration approach," Applied Economics Letters, Taylor & Francis Journals, vol. 3(6), pages 365-368.
    • Handle: RePEc:taf:apeclt:v:3:y:1996:i:6:p:365-368
    DOI: 10.1080/135048596356249
    as

    Download full text from publisher

    File URL: http://www.informaworld.com/openurl?genre=article&doi=10.1080/135048596356249&magic=repec&7C&7C8674ECAB8BB840C6AD35DC6213A474B5
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/135048596356249?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. HENDRY, David F. & RICHARD, Jean-François, 1983. "The econometric analysis of economic time series," LIDAM Reprints CORE 531, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Kugler, Peter & Lenz, Carlos, 1993. "Multivariate Cointegration Analysis and the Long-Run Validity of PPP," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 180-184, February.
    3. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
    4. Hoelscher, Gregory, 1986. "New Evidence on Deficits and Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 1-17, February.
    5. Kim, Yoonbai, 1990. "Purchasing power parity : Another look at the long-run data," Economics Letters, Elsevier, vol. 32(4), pages 339-344, April.
    6. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    7. Lastrapes, William D, 1992. "Sources of Fluctuations in Real and Nominal Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 530-539, August.
    8. Bahmani-Oskooee, Mohsen & Payesteh, Sayeed, 1993. "Budget deficits and the value of the dollar: An application of cointegration and error-correction modeling," Journal of Macroeconomics, Elsevier, vol. 15(4), pages 661-677.
    9. Cebula, Richard J. & Bates, Kimberly & Marks, Louise & Roth, Allison, 1988. "Federal Government Budget Deficits and Interest Rates in the United States: An Empirical Analysis," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 41(1-2), pages 1-7.
    10. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 865-890, October.
    11. Frenkel, Jacob A., 1981. "The collapse of purchasing power parities during the 1970's," European Economic Review, Elsevier, vol. 16(1), pages 145-165.
    12. Evans, Paul, 1986. "Is the dollar high because of large budget deficits?," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 227-249, November.
    13. Abuaf, Niso & Jorion, Philippe, 1990. "Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-174, March.
    14. Kim, Yoonbai, 1990. "Purchasing Power Parity in the Long Run: A Cointegration Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(4), pages 491-503, November.
    15. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ghulam Rasool Madni, 2014. "Taxation, Fiscal Deficit and Inflation in Pakistan," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 17(53), pages 41-60, September.
    2. Gerard Antioch, 1998. "Fiscal policy dynamics in Australia and New Zealand," Applied Economics Letters, Taylor & Francis Journals, vol. 5(9), pages 539-541.
    3. Olorunfemi Yasiru ALIMI & Olumuyiwa Ganiyu YINUSA & Ishola Rufus AKINTOYE & Olalekan Bashir AWORINDE, 2015. "Macroeconomic Effects of Fiscal Policy Changes in Nigeria," The Journal of Accounting and Management, Danubius University of Galati, issue 3, pages 85-94, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wang, Chong, 1998. "Testing for purchasing power parity: a nonlinear approach," ISU General Staff Papers 1998010108000013534, Iowa State University, Department of Economics.
    2. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688, Elsevier.
    3. Jean-Francois Villeneuve & Jagdish Handa, 2006. "Purchasing Power Parity as a long-term memory process: evidence from Canada," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 109-117.
    4. Jaramillo Franco, Miguel & Serván Lozano, Sergio, 2012. "Modeling exchange rate dynamics in Peru: A cointegration approach using the UIP and PPP," MPRA Paper 70772, University Library of Munich, Germany.
    5. Goh, Soo Khoon & Mithani, Dawood, 2000. "Deviation from Purchasing Power Parity: Evidence from Malaysia, 1973–1997," MPRA Paper 51922, University Library of Munich, Germany.
    6. Lucio Sarno & Mark P. Taylor, 2002. "Purchasing Power Parity and the Real Exchange Rate," IMF Staff Papers, Palgrave Macmillan, vol. 49(1), pages 1-5.
    7. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-879, August.
    8. John D. Levendis, 2018. "Time Series Econometrics," Springer Texts in Business and Economics, Springer, number 978-3-319-98282-3, August.
    9. Keivan Deravi & Philip Gregorowicz & Charles E. Hegji, 1992. "Federal Budget Deficits, Money, And Exchange Rates," Contemporary Economic Policy, Western Economic Association International, vol. 10(1), pages 81-90, January.
    10. Alan M. Taylor, 2002. "A Century Of Purchasing-Power Parity," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 139-150, February.
    11. repec:onb:oenbwp:y::i:28:b:1 is not listed on IDEAS
    12. Munehisa Kasuya & Izumi Takagawa, 2001. "Model Uncertainty of Real Exchange Rate Forecast over Mid-term Horizons," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
    13. Ott, Mack, 1996. "Post Bretton Woods deviations from purchasing power parity in G7 exchange rates--an empirical exploration," Journal of International Money and Finance, Elsevier, vol. 15(6), pages 899-924, December.
    14. Francis Ahking, 1997. "Testing long-run purchasing power parity with a Bayesian unit root approach: the experience of Canada in the 1950s," Applied Economics, Taylor & Francis Journals, vol. 29(6), pages 813-819.
    15. Joseph M. Kargbo, 2004. "Purchasing Power Parity And Exchange Rate Policy Reforms In Africa," South African Journal of Economics, Economic Society of South Africa, vol. 72(2), pages 258-281, June.
    16. Taylor Mark P. & Sarno Lucio, 2001. "Real Exchange Rate Dynamics in Transition Economies: A Nonlinear Analysis," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(3), pages 1-26, October.
    17. Jerry Coakley & Stuart Snaith, 2006. "Testing for symmetry and proportionality in a European panel," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 63-71.
    18. Frenkel, Jacob A. & Mussa, Michael L., 1985. "Asset markets, exchange rates and the balance of payments," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 14, pages 679-747, Elsevier.
    19. Davis, George K. & Miller, Norman C., 1996. "Exchange rate mean reversion from real shocks within an intertemporal equilibrium model," Journal of International Money and Finance, Elsevier, vol. 15(6), pages 947-967, December.
    20. Kargbo, Joseph M., 2003. "Cointegration Tests of Purchasing Power Parity in Africa," World Development, Elsevier, vol. 31(10), pages 1673-1685, October.
    21. Rabanal, Pau & Rubio-Ramírez, Juan F. & Tuesta, Vicente, 2011. "Cointegrated TFP processes and international business cycles," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 156-171, March.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apeclt:v:3:y:1996:i:6:p:365-368. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAEL20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.