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Long Run Macroeconomic Relations in the Global Economy

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  • Stephane Dees
  • Sean Holly
  • M. Hashem Pesaran
  • L. Vanessa Smith

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 profiles. We find 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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-01/cesifo1_wp1904.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1904.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_1904

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

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References

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  1. M. Hashem Pesaran & Yongcheol Shin, 2002. "Long-Run Structural Modelling," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 21(1), pages 49-87.
  2. Edward Nelson, 2004. "Monetary policy neglect and the Great Inflation in Canada, Australia, and New Zealand," Working Papers 2004-008, Federal Reserve Bank of St. Louis.
  3. M. Hashem Pesaran & Ron Smith, 2006. "Macroeconometric Modelling with a Global Perspective," IEPR Working Papers 06.43, Institute of Economic Policy Research (IEPR).
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