We reexamine the monetary approach to the exchange rate from several perspectives, using monthly data on the deutsche mark-U.S. dollar exchange rate. Using the Campbell-Shiller technique, we reject the restrictions imposed on the data by the forward-looking rational expectations monetary model. The monetary model, however, is validated as a long-run equilibrium condition. Moreover, imposing the long-run monetary model restrictions in a dynamic error-correction framework leads to exchange rate forecasts that are superior to those generated by a random walk forecasting model.

https://www.jstor.org/stable/info/3867378

The monetary approach to the exchange rate : rational expectations, long-run equilibrium, and forecasting

The sustainability of fiscal deficits has been receiving increasing attention. The issue is paramount for the newly formed euro area and this is one of the motivations of this paper. In order to assess the sustainability of budget deficits, co-integration tests between public expenditures and public revenues, allowing for structural breaks, are performed for the EU countries for the 1970-2003 period. The “unpleasant” empirical results show that with few exceptions fiscal policy may not have been sustainable. EU governments therefore could risk becoming inherently highly indebted, even if the debt-to-GDP ratios seemed to be somehow stabilising at the end of the 1990s. (JEL: H62, H63)

/pdf/fiscal-sustainability-the-unpleasant-european-case-4ypjun7pgc.pdf

Fiscal Sustainability: the Unpleasant European Case *

. This paper provides a survey of some of the recent developments in the field of econometric modelling with cointegrated time series. In particular, we describe the testing and estimation procedures which have become increasingly popular in the recent applied literature. In addition to the ‘two-stage’ procedure proposed by Engle and Granger, we consider extensions to the modelling of dynamic models with cointegrated variables, such as the estimation of models with multiple cointegration vectors, simultaneous systems, models with seasonally integrated and cointegrated variables. Furthermore, we illustrate the practical application of the techniques describes in the paper by means of a tutorial data set.

Cointegration and dynamic time series models

Using a high-quality weekly data set, the author provides several tests of the expectations hypothesis using the vector autoregression and cointegration methodologies, for several maturities between one-week and twelve-months, for the U.K. interbank market. On the basis of the Johansen cointegration analysis, there appears to be a 'break' in the term structure when both the six-month and twelve-month maturities are included as a pair. The latter may be due to either the presence of liquidity constraints or market segmentation or a time varying term premium, all of which would invalidate the assumptions underlying the expectations hypothesis. The author provides some tentative explanations of these diverse results. Copyright 1996 by Royal Economic Society.

The Expectations Hypothesis of the Term Structure: The UK Interbank Market

expectations model, a risk premium model and a market segmentation model. Among the innovations in the present study, we develop the vector autoregressive methodology introduced by Campbell and Shiller (I987) for testing present value models to the case where the frequency of data observation is finer than the maturity of the short-term instrument. In addition, this study is the first to use the interest rate data generated by the ' new' Bank of England method of measuring the yield curve, which is thought to be superior to data on Treasury Bond yields previously published by the Bank (Bank of England I99o).2

/pdf/modelling-the-yield-curve-3r5mo62sqs.pdf

Modelling the yield curve

This paper presents new tests of the efficient markets view of the interest rate term structure utilizing recently developed cointegration methodology in a bivariate autoregressive system consisting of the "spread" between long and short interest rates and the change in the Treasury Bill rate. The efficient markets restrictions on the bivariate autoregressive system are supported by U.K. data from 1963:1 to 1987:1. Further support is obtained from som e simple Granger-causality tests. However, volatility statistics give rather mixed results. On balance, the authors' findings suggest a risk-adjusted expectations approach to the term structure. Copyright 1988 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

The term structure of interest rates in the uk

In this paper, the intertemporal government budget constraint is implemented using a U.K. data base. In particular, the recently developed cointegration methodology is utilized to test whether the U.K. authorities engaged in bubble finance over the period 1961 to 1986. The authors' results are somewhat mixed in that although they find evidence of cointegration between government debt and an appropriate measure of the government surplus, they find that a vector autoregressive representation leads to a rejection of the intertemporal budget constraint. A novel aspect of their implementation concerns an adjustment for the effects of north sea oil on U.K. government finances. Copyright 1990 by Blackwell Publishers Ltd and The Victoria University of Manchester

The intertemporal government budget constraint in the u.k., 1961-1986*

This paper examines implications of the rational expectations-permanent income framework for (quasi-) savings using U.K. data. The residual from a cointegrating regression between income and consumption provides the (quasi-) savings series that is used in conjunction with differenced income in a bivariate vector autoregression, with associated restrictions and exclusion tests. A further implication is that savings should Granger-cause labor income changes. Incomes and consumption are found to be cointegrated in levels as a robust result, and the bivariate system performs well. However, savings Granger-cause labor income changes with a perverse positive sign and exclusion restrictions fail. Copyright 1989 by Royal Economic Society.

Consumption, saving and rational expectations: some further evidence for the U.K.

The aim of MacDonald and Speight (I989), hereafter MS, was to empirically
implement and test the rational expectations - permanent income model,
REPI, with appropriate stationary variables. The paper was in essentially two
parts. The first part dealt with the cointegration of disposable income and two
measures of real consumer expenditure, whilst the second part contained some
restrictions tests from a BVAR model with quasi-savings and the change in
labour income. A subsidiary finding of our modelling strategy was the result
that savings positively Granger, caused the change in labour income. Attfield,
Demery and Duck (i 990), hereafter ADD, question the numerical accuracy of
our labour income series (attributing our finding of a positive relationship
between savings and the change in labour income to this inaccuracy), the
appropriate theoretical measure of labour income, and the efficiency of our
tests of the REPI. As our response to these points indicates, ADD's comments
do not undermine the central findings of our previous paper. Indeed the
striking finding of our previous paper, that once allowance for transitory
consumption is made the REPI restrictions cannot be rejected, is reinforced in
our current note.

https://www.jstor.org/stable/info/2233974

Savings and rational expectations: a correction and further observations

(1989). Does the public sector obey the rational expectations—permanent income hypothesis? A multi–country study of the time series properties of government expenditures. Applied Economics: Vol. 21, No. 9, pp. 1257-1266.

Does the public sector obey the rational expectations—permanent income hypothesis? A multi–country study of the time series properties of government expenditures

A.E.H. Speight

Papers

The term structure of interest rates in the uk

The intertemporal government budget constraint in the u.k., 1961-1986*

Consumption, saving and rational expectations: some further evidence for the U.K.

Savings and rational expectations: a correction and further observations

Does the public sector obey the rational expectations—permanent income hypothesis? A multi–country study of the time series properties of government expenditures