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Long Run Macroeconomic Relations in the Global Economy

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Author Info
Dees, S.
Holly, S.
Pesaran, M.H.
Smith, L.V.

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Abstract

This paper focuses on testing long run macroeconomic relations for interest rates, equity, prices and exchange rates within a model of the global economy. It considers a number of plausible long run relationships suggested by arbitrage in financial and goods markets, and uses the global vector autoregressive (GVAR) model developed in Dees, di Mauro, Pesaran and Smith (2007) to test for long run restrictions in each country/region conditioning on the rest of the world. Bootstrapping is used to compute both the empirical distribution of the impulse responses and the log-likelihood ratio statistic for over-identifying restrictions. The paper also examines the speed with which adjustments to the long run relations take place via the persistence pro.les. We .nd strong evidence in favour of the uncovered interest parity and to a lesser extent the Fisher equation across a number of countries, but our results for the PPP are much weaker. Also as to be expected, the transmission of shocks and subsequent adjustments in financial markets are much faster than those in goods markets.

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Publisher Info
Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0661.

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Length: 29
Date of creation: Jan 2007
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Handle: RePEc:cam:camdae:0661

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Related research
Keywords: Global VAR interdependencies Fisher relationship Uncovered Interest Rate Parity Purchasing Power Parity persistence profile error variance decomposition

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models
E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation
F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation
R11 - Urban, Rural, and Regional Economics - - General Regional Economics - - - Analysis of Growth, Development, and Changes

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," International Trade 0012003, EconWPA. [Downloadable!]
    Other versions:
  2. Nelson, Edward, 2005. "Monetary Policy Neglect and the Great Inflation in Canada, Australia, and New Zealand," MPRA Paper 822, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1997. "Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables," Cambridge Working Papers in Economics 9706, Faculty of Economics, University of Cambridge.
    Other versions:
  4. Crowder, William J & Hoffman, Dennis L, 1996. "The Long-Run Relationship between Nominal Interest Rates and Inflation: The Fisher Equation Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 102-18, February. [Downloadable!] (restricted)
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  6. James R. Lothian & Liuren Wu, 2003. "Uncovered Interest Rate Parity Over the Past Two Centuries," International Finance 0311009, EconWPA. [Downloadable!]
  7. Hashem Pesaran, M., 2007. "A pair-wise approach to testing for output and growth convergence," Journal of Econometrics, Elsevier, vol. 127(1), pages 312-355, May. [Downloadable!] (restricted)
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  8. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January. [Downloadable!] (restricted)
  9. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Blackwell Publishing, vol. 72(3), pages 707-734, 07. [Downloadable!] (restricted)
    Other versions:
  10. Filippo di Mauro & L. Vanessa Smith & Stephane Dees & M. Hashem Pesaran, 2007. "Exploring the international linkages of the euro area: a global VAR analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 1-38. [Downloadable!]
    Other versions:
  11. Martin D.D. Evans & Karen K. Lewis, 1993. "Do Expected Shifts in Inflation Affect Estimates of the Long-Run Fisher Relation?," Working Papers 93-06, New York University, Leonard N. Stern School of Business, Department of Economics.
    Other versions:
  12. Park, Joon Y., 2002. "An Invariance Principle For Sieve Bootstrap In Time Series," Econometric Theory, Cambridge University Press, vol. 18(02), pages 469-490, May. [Downloadable!]
  13. repec:cup:etheor:v:11:y:1995:i:3:p:530-36 is not listed on IDEAS
  14. Edwin Choi & Peter Hall, 2000. "Bootstrap confidence regions computed from autoregressions of arbitrary order," Journal Of The Royal Statistical Society Series B, Royal Statistical Society, vol. 62(2), pages 461-477. [Downloadable!] (restricted)
  15. Chang, Yoosoon & Park, Joon Y. & Song, Kevin, 2006. "Bootstrapping cointegrating regressions," Journal of Econometrics, Elsevier, vol. 127(2), pages 703-739, August. [Downloadable!] (restricted)
  16. Yoosoon Chang & Joon Y. Park, 2003. "A Sieve Bootstrap For The Test Of A Unit Root," Journal of Time Series Analysis, Blackwell Publishing, vol. 24(4), pages 379-400, 07. [Downloadable!] (restricted)
  17. Stock, James H & Watson, Mark W, 1996. "Evidence on Structural Instability in Macroeconomic Time Series Relations," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 11-30, January.
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  18. Li, Hongyi & Maddala, G. S., 1997. "Bootstrapping cointegrating regressions," Journal of Econometrics, Elsevier, vol. 80(2), pages 297-318, October. [Downloadable!] (restricted)
  19. Pesaran, M. Hashem & Shin, Yongcheol, 1996. "Cointegration and speed of convergence to equilibrium," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 117-143. [Downloadable!] (restricted)
    Other versions:
  20. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January. [Downloadable!] (restricted)
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  21. Harbo, Ingrid, et al, 1998. "Asymptotic Inference on Cointegrating Rank in Partial Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 388-99, October.
  22. Frederic S. Mishkin, 1985. "Are Real Interest Rates Equal Across Countries? An Empirical Investigation of International Parity Conditions," NBER Working Papers 1048, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  23. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jan P.A.M. Jacobs & Kenneth F. Wallis, 2007. "Cointegration, Long-Run Structural Modelling And Weak Exogeneity: Two Models Of The Uk Economy," CAMA Working Papers 2007-12, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
  2. Jiri Podpiera, 2007. "Policy rate decisions and unbiased parameter estimation in typical monetary policy rules," Working Paper Series 771, European Central Bank. [Downloadable!]
  3. Paul Levine & Joseph Pearlman & Richard Pierse, 2007. "Linear-quadratic approximation, external habit and targeting rules," Working Paper Series 759, European Central Bank. [Downloadable!]
  4. Olli Castrén & Stéphane Dées & Fadi Zaher, 2008. "Global Macro-Financial Shocks and expected default frequencies in the Euro area," Working Paper Series 875, European Central Bank. [Downloadable!]
  5. Ron Smith & M. Hashem Pesaran, 2007. "Monetary Policy Transmission and the Phillips Curve in a Global Context," Kiel Working Papers 1366, Kiel Institute for the World Economy. [Downloadable!]
  6. M. Hashem Pesaran & Til Schuermann & L. Vanessa Smith, 2008. "Forecasting economic and financial variables with global VARs," Staff Reports 317, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  7. Melisso Boschi, 2007. "Foreign capital in Latin America: A long-run structural Global VAR perspective," Economics Discussion Papers 647, University of Essex, Department of Economics. [Downloadable!]
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