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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 0703.

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Length: 29
Date of creation: Jan 2007
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Handle: RePEc:cam:camdae:0703

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

Other versions of this item:

Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
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

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References listed on IDEAS
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  6. 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.
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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. Melisso Boschi & Alessandro Girardi, 2008. "The Contribution Of Domestic, Regional And International Factors To Latin America'S Business Cycle," CAMA Working Papers 2008-33, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
    Other versions:
  2. 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!]
  3. Alessandro Galesi & Marco J. Lombardi, 2009. "External shocks and international inflation linkages - a Global VAR analysis," Working Paper Series 1062, European Central Bank. [Downloadable!]
  4. Dees, Stephane & Pesaran, Hashem & Smith, L. Vanessa & Smith, Ron P., 2008. "Identification of New Keynesian Phillips Curves from a Global Perspective," IZA Discussion Papers 3298, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  5. Nils Jannsen, 2009. "National and International Business Cycle Effects of Housing Crises," Kiel Working Papers 1510, 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. 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!]
  8. Jiri Podpiera, 2007. "Policy rate decisions and unbiased parameter estimation in typical monetary policy rules," Working Paper Series 771, European Central Bank. [Downloadable!]
  9. 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!]
  10. Paul Levine & Joseph Pearlman & Richard Pierse, 2007. "Linear-quadratic approximation, external habit and targeting rules," Working Paper Series 759, European Central Bank. [Downloadable!]
    Other versions:
  11. 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!]
  12. Truman F. Bewley, 2007. "Insights gained from conversations with labor market decision makers," Working Paper Series 776, European Central Bank. [Downloadable!]
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