Showing papers on "Cointegration published in 1988"

Testing for Common Trends

Abstract: Cointegrated multiple time series share at least one common trend. Two tests are developed for the number of common stochastic trends (i.e., for the order of cointegration) in a multiple time series with and without drift. Both tests involve the roots of the ordinary least squares coefficient matrix obtained by regressing the series onto its first lag. Critical values for the tests are tabulated, and their power is examined in a Monte Carlo study. Economic time series are often modeled as having a unit root in their autoregressive representation, or (equivalently) as containing a stochastic trend. But both casual observation and economic theory suggest that many series might contain the same stochastic trends so that they are cointegrated. If each of n series is integrated of order 1 but can be jointly characterized by k > n stochastic trends, then the vector representation of these series has k unit roots and n — k distinct stationary linear combinations. Our proposed tests can be viewed alterna...

An empirical examination of long-run purchasing power parity using cointegration techniques

Abstract: This paper presents an empirical analysis of long-run purchasing power parity (PPP) for five major exchange rates using recently developed econometric techniques on the cointegration of economic time series. Our empirical results are extremely unfavourable to the PPP hypothesis as a long-run equilibrium condition, even with an allowance made for measurement error and/or tranportation costs. In particular, we are unable to reject the hypothesis of non-cointegration of the exchange rate and relative prices for any of the countries concerned. Far from finding a stable, long-run proportionality between exchange rates and relative prices, our results therefore suggest that they tend to drift apart without bound.

Cointegration and Tests of Purchasing Power Parity

Abstract: Nonstationarity in the levels of spot exchange rates and domestic and foreign price indices makes the use of conventional tests of the absolute version of purchasing power parity (PPP) inappropriate. If PPP is true, inter-country commodity arbitrage ensures that deviations from a linear combination of spot exchange rates and domestic and foreign price levels should be stationary. Under these conditions, exchange rates and price levels should form a cointegrated system. We find the null hypothesis of no cointegration cannot be rejected for all five countries, thus violating the "long-run" absolute version of PPP.

Arima and Cointegration Tests of PPP under Fixed and Flexible Exchange Rate Regimes

Abstract: Real exchange rates between the United States and its major trading partners were calculated for the Bretton Woods and flexible exchange rate periods. Unit root tests indicate that Purchasing Power Parity performed poorly in both periods. Tests for cointegration reveal limited instances in which it is possible to estimate the deviations from PPP as an error correcting model. The estimated error correcting models indicate that foreign, but not U.S., prices responded to deviations from PPP. Frenkel's (1981b) finding that Purchasing Power Parity (PPP) worked better during the 1920s than the 1970s caused considerable controversy. For example, Davutyan and Pippenger (1985) contend that the socalled "collapse" of PPP is a result of an increase in the relative importance of real versus monetary shocks. They argue that the 1970s, as opposed to the 1920s, was characterized by real supply shocks and the international coordination of monetary policies. The argument is that PPP did not fail; rather, there was an increase in the volatility of those factors giving rise to deviations from PPP. Hakkio (1984) reestimated PPP over the 1920s and 1970s; using cross-country tests (i.e., SURE estimates) to improve the efficiency of his estimates, he was able to support the hypothesis that PPP worked better in the 1970s than in the 1920s. On the other hand, papers by Adler and Lehman (1983), Dornbusch (1980), Frenkel (1981a), Junge (1985), and Krugman (1978) report findings contrary to the PPP hypothesis. Moreover, Kenen and Rodrik (1986) find that the volatility of real exchange rates has increased throughout the flexible rate period. This paper tries to shed some light on the importance and persistence of the observed deviations from Purchasing Power Parity under alternative exchange rate systems. While it is interesting to compare PPP in the 1920s versus the 1970s, it is equally useful to compare the 1960s versus the 1970s and 1980s. If real supply shocks and lack of monetary coordination are characteristic of the latter period, PPP should perform better in the 1960s. To illustrate the issues involved, consider the following econometric model of (Relative) Purchasing Power

Estimation and Inference in Models of Cointegration: A Simulation Study

Abstract: This paper studies the finite sample distributions of estimators of the cointegrating vector of linear regression models with I(1) variables. Attention is concentrated on the least squares (OLS) and instrumental variables (IV) methods analyzed in other recent work (Phillips and Hansen (1988)). The general preference of OLS to IV techniques suggested by asymptotic theory is reinforced by our simulations. An exception arises for cases of low signal to noise, where spurious IV techniques (so named for their use of instruments that are structurally unrelated to the model) outperform uncorrected least squares. We verify the presence of a small sample estimation bias and show that the Park-Phillips bias correction does reduce the magnitude of this problem. We also find that there is substantial distributional divergence of t-statistics from the normal, unless the Phillips-Hansen endogeneity correction is used. Finally, we apply these methods to aggregate consumption and income data. Our empirical results indicate that the endogeneity and serial dependence connections are important and lead to intuitively plausible changes in the estimated coefficients.

Hypothesis Testing for Cointegration Vectors: with Application to the Demand for Money in Denmark and Finland

Abstract: The purpose of this paper is to give a systematic account of the maximum likelihood inference concerning cointegration vectors in non-stationary vector value autoregressive time series with Gaussian errors. The hypothesis of r cointegration vectors is given a simple parametric formulation in terms of cointegration vectors and their weights. We then estimate and test linear hypotheses about these. We find that the asymptotic inference for the linear hypotheses can be performed by applying the usual ² test. We also give some very simple Wald test and their asymptotic properties. The methids are illustrated by data from the Danish and the Finnish economy on the demand for money.

Monetary Policy Without Quantity Variables

Abstract: The collapse in the 1980s of familiar relationships connecting money to either income or prices has thrown into question long-standing presumptions about the appropriate conduct of monetary policy. Once data from the 1980s are included, tests of several kinds -- including simple regression tests, vector autoregressions tests, and tests for cointegration -- all fail to show evidence of properties that would support using money as the central fulcrum of monetary policy. The Federal Reserve System, whether in response to these developments or for independent reasons, appears to have refocused monetary policy onto movements of short-term interest rates. The experience of the i950s and 1960s suggests that this alternative approach also suffers from potentially serious drawbacks, which little recent research has addressed.

Monetary Policy Without Quantity Variables

Abstract: The collapse in the 1980s of familiar relationships connecting money to either income or prices has thrown into question long-standing presumptions about the appropriate conduct of monetary policy. Once data from the 1980s are included, tests of several kinds -- including simple regression tests, vector autoregressions tests, and tests for cointegration -- all fail to show evidence of properties that would support using money as the central fulcrum of monetary policy. The Federal Reserve System, whether in response to these developments or for independent reasons, appears to have refocused monetary policy onto movements of short-term interest rates. The experience of the i950s and 1960s suggests that this alternative approach also suffers from potentially serious drawbacks, which little recent research has addressed.

Are commodity prices leading indicators of OECD prices

Abstract: This paper examines the hypothesis that commodity price trends are useful indicators of OECD price developments. After a discussion of statistical techniques to assess the time series properties of individual price indices, integration and cointegration tests are conducted on a wide set of individual and aggregate commodity price indices and consumer price indices for the major seven OECD countries. The results of the analysis suggest that there is no clear evidence of any equilibrium relationship between levels of consumer and commodity prices. But relations between changes in a number of commodity prices such as metals and agricultural raw material prices and consumer prices may be established. The stability over time of such relationships is also tested ...

Econometric modeling of consumers' expenditure in Venezuela

Abstract: Starting from a theoretical model with optimizing economic agents, we develop a highly parsimonious econometric model of consumers' expenditure on non-durables and services in Venezuela for 1970-85 Disposable income, liquidity, and inflation determine expenditure in an economically sensible fashion The empirical model is robust and has constant, well-determined parameter estimates In specifying it, econometric methodology plays a fundamental role, and we address issues of empirical model design and evaluation, cointegration, exogeneity, policy analysis, and encompassing Using the last concept, a large class of expectations and VAR models is found to be incompatible with the data In particular, Hall's (1978) hypothesis (derived from the life cycle-permanent income hypothesis) that expenditure is a random walk and only predictable from its own past is firmly rejected The empirical model provides a clear interpretation for why that is so

Efficiency in the Forward Exchange Market: An Application of Cointegration

Abstract: This paper defines a cointegrated system and discusses the implications of cointegration for efficiency in the forward exchange market using Irish daily data. Tests are discussed and carried out and the results are compared and contrasted with those of an earlier paper by Leddin (1988) who examined efficiency in the Irish forward market using different techniques. In contrast with the results which were obtained by Hakkio and Rush (1987), who used the cointegration approach to study efficiency in the US and German forward exchange markets, the study finds substantial evidence of market inefficiency.

Econometric tests of rationality and market efficiency

Abstract: Many economic theories give rise to restrictions between the future rational expectations of a set of variables. This paper describes how such theories can be tested from vector time series models. Particular attention is given to problems of nonstationarity and the use of the concept of cointegration in the modeling and testing procedure.

Monetary Policy Without Quantity Variables

Abstract: The collapse in the 1980s of familiar relationships connecting money to either income or prices has thrown into question long-standing presumptions about the appropriate conduct of monetary policy. Once data from the 1980s are included, tests of several kinds -- including simple regression tests, vector autoregressions tests, and tests for cointegration -- all fail to show evidence of properties that would support using money as the central fulcrum of monetary policy. The Federal Reserve System, whether in response to these developments or for independent reasons, appears to have refocused monetary policy onto movements of short-term interest rates. The experience of the i950s and 1960s suggests that this alternative approach also suffers from potentially serious drawbacks, which little recent research has addressed.