testing the stationarity of interest rates using a sur approach abstract using data on average yields to maturity of german bonds with different time to maturity it is shown that the time series contain a unit root if the standard augmented dickey fuller test is applied separately to each series to improve the power of the test we carried out a recently developed approach estimating the regressions for each time to maturity jointly using a seemingly unrelated regressions approach

deviations from purchasing power parity in the long run this paper demonstrates that deviations from purchasing power parity reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible rate periods for a wide variety of countries and in both monthly and annual data since this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper proposes an alternative explanation which instead relies on financial arbitrage in bonds as the underlying mechanism this paper will demonstrate that deviations from purchasing power parity ppp reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible exchange rate periods for a wide variety of countries and in both monthly and annual data this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper therefore proposes an alternative explanation which does not presuppose free trade in goods but which instead relies on financial arbitrage in bonds as the underlying mechanism the major implication of the theory and the results is that ppp is as likely to be violated in the long as in the short run as an empirical matter deviations from ppp can be observed for most currencies at any instant see kravis et al 21 stockman 37 and genberg 15 among others these deviations are typically both cumulative and persistent the real exchange rate can remain on either side of parity for lengthy but variable time intervals of a year or more as a consequence the current consensus shared

a divisible search model of fiat money this paper extends the kiyotaki wright search model of fiat money to allow for divisible money and goods the extension allows me to examine the standard issues in monetary economics such as the neutrality and superneutrality of money by severing the artificial link in the kiyotaki wright model between the money supply and the number of money holders it is shown that money is neutral but not superneutral money growth generates a trading opportunity effect it changes the fraction of different agents in the economy and hence changes the probability with which agents have a successful match in addition money growth has a negative effect on the real money balance that is familiar in walrasian monetary models the balance of the two effects can imply a positive optimal money growth rate

cointegration tests of purchasing power parity the impact of non traded goods abstract this paper explores the relationship between non traded goods relative prices and the real exchange rate we apply the johansen maximum likelihood procedure to two different data sets of traded and non traded prices first we develop a model which highlights the importance of non traded relative price movements in causing deviations in the real exchange rate away from ppp we find a strong association a rise fall in the domestic relative price of non traded goods is associated with an appreciation depreciation in the real exchange rate while the opposite is true for the foreign relative price we conclude that non traded goods relative price movements are an important determinant of real exchange rate behavior

a quantitative reassessment of the purchasing power parity hypothesis evidence from norway and the united kingdom summary annual data from norway and the united kingdom from 1874 to 1971 are used to reassess the empirical performance of the purchasing power parity ppp doctrine the simple version of the ppp relationship is supported by the data only if different short run dynamics during a floating rate period 1914 1928 is allowed for two sets of factors were found to be important in amending the simple ppp model these were short run cyclical variables affecting the adjustment towards the ppp equilibrium relationship and long run structural factors such as productivity and terms of trade within this expanded model the proportionality between the exchange rate and relative price levels could not be rejected

purchasing power parity in less developed and transition economies a review paper abstract the concept of purchasing power parity ppp has been the subject of numerous studies many of which have been unable to prove conclusively this core principle of international finance although industrialized countries have received most of the attention studies that focus on less developed and transition economies have also attained mixed results this study surveys trends in this branch of the literature highlighting the econometric advances that have sought to solve this puzzle while pointing out that more needs to be done to address the reasons that might cause ppp not to hold

the australian growth miracle an evolutionary macroeconomic explanation an evolutionary macroeconomic approach is applied to explain economic growth in australia from 1901 to 2008 support is found for the hypothesis that there were two distinct developmental phases before and after world war ii the evidence suggests that in each phase growth followed an innovation diffusion trajectory made possible by a growing capital stock in the first phase capital equipment seems to have augmented labour while in the second it reduced labour inputs replaced by cheap fossil fuel inputs this allowed significant transfers of labour into an expanding service sector strong economies of scale were operative in both phases with labour hour inputs dominating in the first phase and fossil fuel consumption in the second the results indicate that the australian economy currently has very strong growth potential over the coming decade although its heavy reliance on fossil fuels is viewed as a threat in the medium term

purchasing power parity and cointegration the greek evidence from the 1920s abstract this paper presents empirical evidence which supports the purchasing power parity ppp hypothesis for three bilateral exchange rates involving the greek drachma during the 1920s using the technique of cointegration of economic time series the results are obtained for a period of high money supply growth and a high and variable rate of inflation which gave rise to large differentials in price movements between greece and the other countries the speed at which long run ppp was reached following a shock was 50 per cent per month confirming the results of other studies of ppp over the 1920s and explaining the supportive evidence for long run ppp even though data over a short period were used jel f31

bounds tests of the theory of purchasing power parity abstract in this paper we test the absolute and relative purchasing power parity ppp hypotheses during the recent flexible exchange rate period using quarterly data for 21 oecd countries in doing so we use a new econometric technique developed by m h pesaran et al bounds testing approaches to the analysis of long run relationships university of cambridge department of applied economics working paper 9907 this approach is particularly interesting as it is capable of testing the existence of long run relations regardless of whether the underlying variables are stationary integrated or mutually cointegrated

liquidity loanable funds and real activity abstract this paper develops a general equilibrium model of two traditional explanations of the monetary black box linking money and real activity the liquidity effect and the loanable funds effect these effects are modeled with a monetary production economy in which central bank injections of cash are funnelled into the economy through the credit market since only borrowers have direct access to the newly injected cash monetary injections cause nominal interest rates to fall if firms are borrowers then monetary injections also increase current and future real activity

cointegration between exchange rates and relative prices another view abstract in this paper the cointegration property of exchange rates and relative prices as implied by the purchasing power parity theory ppp is reexamined using a time varying parameter tvp approach such an approach recognizes the possibility that the lack of cointegration between exchange rates and relative prices found in recent literature may be the result of the nonstationarity of the cointegrating regression parameters themselves the tests of cointegration in a tvp framework indicate that ppp is better supported and point to the presence of structural instability in the long run equilibrium relationship between exchange rates and relative prices

tests of different monetary aggregates for the monetary models of the exchange rate in five asean countries this study examines the usefulness of divisia money relative to simple sum money for exchange rate modelling in a period of rapid financial deregulation this comparison is conducted using the monetary model of the exchange rate in the long run modelling the divisia money is significantly superior to simple sum money in the case of malaysia and the philippines while indifferent for indonesia singapore and thailand

price formation in an open economy theory and evidence for the united kingdom 1951 1991 price formation is an increasingly important part of modern macroeconomics however the empirical literature on price setting is diverse and confused this paper uses cointegration techniques to test theories of price setting on uk aggregate data for 1951 91 we find i domestic prices are determined by both domestic costs and world prices and ii at the macroeconomic level prices are related to marginal cost rather than average or normal cost

arima and cointegration tests of ppp under fixed and flexible exchange rate regimes 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

does the real exchange rate follow a random walk the pacific basin perspective abstract in this paper we present evidence that dispels the view that ppp has broken down during the 1970s and 1980s evidence from unit root tests of the real exchange rate indicate that ppp held as a long run equilibrium condition for eight pacific basin countries over the period 1974 to 1987 in contrast we find the nominal exchange rates to be non stationary additional evidence however shows that strong trend components bind the nominal exchange rates of that set of countries together jel f31

long run purchasing power parity during the recent float abstract this paper examines the relevance of long run purchasing power parity ppp which allows for measurement errors during the recent floating exchange rate period previous empirical studies generally fail to find support for long run ppp over this period in this paper in this paper the cointegration property of exchange rates and prices is examined using maximum likelihood procedure and we find significant evidence favorable to long run ppp further tests for symmetry and proportionality indicate that these two conditions are not generally with the data the results support the hypothesis of long run ppp with measurement errors in prices

does comovement among exchange rates imply market inefficiency abstract this paper argues that contrary to what has been reported in the empirical literature previously cointegration between pairs of exchange rates does not necessarily rule out informational efficiency in currency markets the basic reason is that market efficiency does not rule out predictable exchange rate movements but only rules out arbitrage opportunities from predictable exchange rate movements as the usual parity conditions dictate

purchasing power parity an analysis based on the evolutionary spectrum the bulk of the literature on the empirical validation of the purchasing power parity ppp has been based on cointegration although on rare occasions band spectrum analysis has also been used the former is tied down to the use of notional time in the analysis of systems away from equilibrium and the latter is circumscribed by the slutzky yule effect both these drawbacks are sought to be remedied in the present paper which seeks to bring to bear upon the ppp a new approach derived from the concept of a time varying spectrum both absolute and relative versions of the doctrine are tested for ten advanced economies over the post 1973 period uniform rejection of the ppp occurs with the us as base but with centring on the dm the evidence seems to be supportive of the ppp in its relative version for three european countries

inflation and currency depreciation in germany 1920 1923 a dynamic model of prices and the exchange rate this paper presents a dynamic model of the german hyperinflation explaining prices the exchange rate and the money supply in the model estimated simultaneously the nominal exchange rate is allowed to diverge from purchasing power parity in the short run the monetary approach to exchange rate determination and the quantity theory of money are assumed to be valid in the long run the dynamic adjustment of prices and the exchange rate to monetary disturbances is made explicit and currency substitution between domestic and foreign currency is introduced explicitly the problem of the autocorrelation of the residuals of the money demand function found in previous studies is resolved the fit of inflation and exchange rate changes is very satisfactory and the speed of adjustment of the exchange rate to monetary disturbances is found to be much higher than for prices copyright 1995 by ohio state university press

liquidity effects and the monetary transmission mechanism several recent papers provide strong empirical support for the view that an expansionary monetary policy disturbance generates a persistent decrease in interest rates and a persistent increase in output and employment existing quantitative general equilibrium models which allow for capital accumulation are inconsistent with this view there does exist a recently developed class of general equilibrium models which can rationalize the contemporaneous response of interest rates output and employment to a money supply shock however a key shortcoming of these models is that they cannot rationalize persistent liquidity effects this paper discusses the basic frictions and mechanisms underlying this new class of models and investigates one avenue for generating persistence we argue that once a simplified version of the model in christiano and eichenbaum 1991 is modified to allow for extremely small costs of adjusting sectoral flow of funds positive money shocks generate long lasting quantitatively significant liquidity effects as well as persistent increases in aggregate economic activity

risk aversion exchange rate uncertainty and the law of one price insights from the market for online air travel tickets we argue that risk aversion driven by exchange rate uncertainty causes a wedge between the domestic and foreign prices of a homogeneous good we test our hypothesis using a unique micro data set from a market with minimum imperfections the empirical findings validate our hypothesis as accounting for exchange rate uncertainty we are able to explain a significant proportion of deviations from the law of one price overall our analysis suggests the possibility of a new solution to the purchasing power parity puzzles

border region panel evidence on ppp deviations this article examines prices for 32 identical menu items sold by restaurant franchises operating on both sides of the border between el paso in the us and ciudad juarez in mexico from july 1997 to june 2008 the relationship between real exchange rate rer volatility and the degree of price convergence is examined within a panel data context the city pair and goods selected provide a unique experiment in which distance tradability and industry considerations are set aside and the extent of rer volatility is the only factor to influence price convergence we find nonmonotonic relationships between mean reversion and rer volatility very fast adjustments for both low and high volatility panels of goods between 1 and 2 months and slower half lives between 3 and 4 months at moderate levels of uncertainty these figures are however substantially smaller than the 6 or 7 months reported in previous research for general us mexico goods suggesting the very strong price convergence observed along the us m

the response of exchange rates to permanent and transitory shocks under floating exchange rates abstract using the joint behavior of inflation and real exchange rates we develop an empirical model to uncover the sources of the fluctuations in the real dollar exchange rates of four major industrial countries under the current float this model allows us to construct two time series for each country pair one representing the permanent component of each real exchange rate and the other the purely transitory component over the period as a whole transitory shocks played a relatively small but statistically significant role real dollar exchange rates therefore did not simply evolve in response to permanent shocks instead there are instances in which temporary shocks made a substantial contribution we conclude that the random walk model though an approximate statistical description of real exchange rate behavior is a poor guide to model structure jel f31

monetary policy and distribution a segmented markets model of monetary policy is constructed in which a novel feature is goods market segmentation and its relationship to conventional asset market segmentation the implications of the model for the response of prices interest rates consumption labor supply and output to monetary policy are determined as well optimal monetary policy is studied as are the costs of inflation the model features persistent nonneutralities of money relative price effects of increases in the money supply persistent liquidity effects and a negative fisher effect from a money supply increase a friedman rule is in general suboptimal

purchasing power parity a quantitative reassessment of the 1920s experience abstract the purpose of this paper is to test the hypothesis of purchasing power parity the basic methodology is to start by estimating a general distributed lag equation relating the excchangr rate to its own past and to current and past relative price levels successively more restricted version are then proposed and tested against the general model two interesting facts come out of this one is that the proportionality restrictin is not supported by the data and the other is that all the models estimated by frenkel 1978 are rejected in favor of less restricted models

purchasing power parity in the short and long run a reappraisal of the post 1973 evidence in this paper an attempt is made to separate the short run and long run aspects of the purchasing power parity ppp relationship using the techniques of band spectral regression and cointegration for eight industrialized countries the long run ppp is first tested for all the eight countries with reference to their nominal bilateral exchange rates vis a visthe us dollar for five european currencies the analysis is repeated with respect to the deutschmark with a separate consideration of the post ems period in the concluding sections possible reasons for ppp deviations are examined

real and nominal exchange rates in the long run an empirical investigation abstract this paper reports on econometric tests of the hypothesis that purchasing power parity holds as a long run relationship using data on eight industrialized countries during the flexible exchange rate period the empirical work proceeds by i testing whether nominal exchange rates and relative price levels are co integrated and ii conducting impulse response analysis of long run exchange rate and relative price level changes to explain the data keynesian models suggest that shocks during the estimation period were due principally to exogenous shifts in aggregate demand while equilibrium models suggest that monetary factors have been relatively more important

resilience and electricity systems a comparative analysis electricity systems have generally evolved based on the natural resources available locally few metrics exist to compare the security of electricity supply of different countries despite the increasing likelihood of potential shocks to the power system like energy price increases and carbon price regulation this paper seeks to calculate a robust measure of national power system resilience by analysing each step in the process of transformation from raw energy to consumed electricity countries with sizeable deposits of mineral resources are used for comparison because of the need for electricity intensive metals processing we find that shifts in electricity intensive industry can be predicted based on countries power system resilience

purchasing power parity in developing countries multi period evidence under the current float abstract using panel unit root tests we examine purchasing power parity ppp for us dollar real exchange rates of developing countries during the current floating rate period since evidence of ppp may vary from period to period we examine the data for moving 10 year periods from 1976 85 up to 1990 99 we organize panels based on country characteristics influencing the validity of ppp those characteristics include openness inflation and the level and growth rate of per capita gdp although we find stronger evidence of ppp after 1980 our examination of panel data over 15 10 year periods yields only limited support for ppp

long run purchasing power parity in the 1920s abstract this paper presents an empirical analysis of long run purchasing power parity ppp during the 1920s float using recently developed methodology on the cointegration of economic time series our results are generally supportive of ppp as a long run equilibrium condition on which exchange rates tended to converge over the period for dollar sterling however there is some evidence of a non stationary drift away from fundamentals during the last year or so before britain s return to the gold standard perhaps due to speculation our results also appear to reconcile some apparently conflicting evidence in the literature

monetary shocks in a spatial overlapping generations model abstract in a classic paper the lag in effect of monetary policy friedman 1961 describes an expansionary open market operation as diffusing across the economy pulling the price in one market out of line with the price in the next market as it spreads the objective of this paper is to build a model where this process is made explicit specifically where money affects real economic activity by altering relative prices of goods as it spills from one market into the next thus the paper superimposes a monetary overlapping generations model on a simple abstract spatial structure specifically a graph and then studies the effect of an expansionary monetary policy

long run versus short run behaviour of the real exchange rates this paper discusses the mean stationarity of real exchange rates by using new time series methods and new tests the question whether the real exchange rates have a unit root or are level reverting is set in the general and flexible framework of fractionally integrated processes the estimations and tests sustain the claim that real exchange rates may be nonstationary and not revert to any short run parity however estimations also suggest that real exchange rates behave differently on the short and on the long run and that they may revert to parity in a century long period

cointegration and tests of purchasing power parity 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

capital flows real exchange rate misalignment and ppp tests in emerging market countries the economic performance of emerging markets has significant impacts on economic growth and volatility of macroeconomic indicators in various countries emerging markets accounted for 20 43 of global exports during the period 1970 2005 and held 70 of global foreign reserves in recent years more than 50 of the exports from the euro area japan and the united states go to emerging markets and other developing countries the globalization of capital flows is facilitated by technological innovations and excellent information networks coupled with sharp increases in savings that are directed into financial instruments across borders the use of purchasing power parity ppp as a benchmark in exchange rate policy reforms assumes the existence of a stable relationship between the exchange rate and the ratio of price levels in two countries this article investigates whether or not long run ppp holds in emerging markets johansen s cointegration technique is used with annual data in analysing the relationsh

some further evidence on the law of one price the law of one price still holds international trade models often postulate the existence of a representative price i e the price which prevails at all markets this is known as the law of one price in this paper the law of one price is tested for seven commodities among four countries by explicitly considering transaction costs the empirical evidence suggests that in most cases the law of one price cannot be rejected asa maintained hypothesis furthermore for the remaining cases transaction costs seem to cause the failure

is there trend reversion in purchasing power parity abstract this study presents some empirical evidence on purchasing power parity ppp using residualbased co integration tests engle and granger s 1987 tests and the ratio of the variance of higher order differences to the variance of the first difference of the residuals of the cointegrating regression are used monthly data over a span of 30 years do not provide any empirical support to the theory conversely in the annual data long run equilibrium tendencies are evident since ppp has been widely used to provide an anchor for the equilibrium exchange rate our results indicate that such an assumption is not completely inadequate

are shocks to real effective exchange rates permanent or transitory evidence from pacific island countries in this article we consider the stability of the real effective exchange rates for four pacific island countries using the lee and strazicich 2003a b unit root test which allows one to incorporate at most two structural breaks in the data series our main finding is that for papua new guinea and samoa exchange rates are stable implying that shocks will have a transitory effect on real effective exchange rates while for fiji and the solomon islands we find exchange rates to be unstable implying that shocks will have a permanent effect on real effective exchange rates

a reexamination of purchasing power parity a multicountry and multiperiod study abstract this paper re examines the purchasing power parity ppp theory in a multiple exchange rate world owing to a lack of precision in estimating the parameters many authors concluded that ppp did not hold very well in the 1970s using a time series cross sectional estimation procedure we are unable to reject the hypothesis that ppp holds in several currencies simultaneously in addition the parameters are precisely estimated this result follows from the estimation procedure which allows us to exploit the cross sectional variation in the data and the contemporaneous correlation in the deviations from ppp

an empirical examination of long run purchasing power parity as theory of international commodity arbitrage an empirical analysis of long run purchasing power parity ppp as a theory of international commodity arbitrage between uk and us prices and the sterling us dollar exchange rate for the period 1975 1980 is presented econometric techniques concerning the cointegration of economic time series are applied to a sample of 35 manufactured commodities which in 1977 constituted approximately a quarter of the net output of all manufacturing industry in great britain our results are extremely unfavourable to the ppp hypothesis as a stable long run proportionality between exchange rates and disaggregated prices

testing purchasing power parity in a multivariate cointegrating framework this paper examines a bilateral ppp purchasing power parity relationship between australia and the 11 major trading countries by means of two alternative econometric techniques a multivariate cointegrating framework and a band spectral regression it is acknowledged that there is no strong evidence that classical ppp holds in all cases however the generalized version of ppp holds in all cases and provides a better explanation of the long run relations between exchange rates and relative prices the use of different price indices i e cpi and wpi lead to different estimates and hence different policy implications

purchasing power parity and country characteristics evidence from panel data tests abstract we examine long run purchasing power parity ppp using panel data methods to test for unit roots in us dollar real exchange rates of 84 countries we find stronger evidence of ppp in countries more open to trade closer to the united states with lower inflation and moderate nominal exchange rate volatility and with similar economic growth rates as the united states we also show that ppp holds for panels of european and latin american countries but not for african and asian countries our findings demonstrate that country characteristics can help explain both adherence to and deviations from long run ppp

systems thinking market failure and the development of innovation policy the case of australia innovation policy is increasingly informed from the perspective of a national innovation system nis but despite the fact that research findings emphasize the importance of national differences in the framing conditions for innovation policy prescriptions tend to be uniform justifications for innovation policy generally relate to notions of market failure that are applicable in all nations in all conditions in this paper we develop a broad framework for nis analysis involving free market coordination and complex evolutionary system approaches within this framework we explore the evolving relationship between market failure and systems approaches to innovation policy in the case of australia drawing on information and analysis collected for a major review of australia s nis and the government s 10 year plan in response to it we show how the free market trajectory of policy making of past decades is being extended complemented and refocused by new approaches to complex evolutionary system thinking these approaches are shown to emphasize the importance of systemic connectivity evolving institutions and organizational capabilities nonetheless despite the fact that there has been much progress in this direction in the australian debate the predominant logic behind policy choices still remains one of addressing market failure and the primary focus of policy attention continues to be science and research rather than demand led approaches we discuss how the development and elaboration of notions of systems failure rather than just market failure can further improve policy making in the future

was it real the exchange rate interest differential relation over the modern floating rate period in this paper we explore the relationship between real exchange rates and real interest rate differentials in the united states germany japan and the united kingdom contrary to theories based on the joint hypothesis that domestic prices are sticky and monetary disturbances are predominant we find little evidence of a stable relationship between real interest rates and real exchange rates we consider both in sample and out of sample tests one hypothesis that is consistent with our findings is that real disturbances such as productivity shocks may be a major source of exchange rate volatility this paper investigates the empirical relationship between major currency real exchange rates and real interest rates over the modern post march 1973 flexible rate experience the exchange rates examined here include the dollar mark dollar yen and dollar pound rates our two major findings are as follows first the data do not indicate a strong correspondence between real interest rate differentials short term or long term and real exchange rates this finding appears to conflict with the predictions of most monetary and portfolio balance models of exchange rate determination though the conflict can be substantially reconciled if aggregate disturbances are primarily real in nature i e changes in productivity tastes etc it is true that in many cases the sign of the estimated exchange rate interest rate differential relationship is consistent with the possible predominance of financial market disturbances but the relationship is not stable enough to be statistically significant second although one does find some evidence of a unit root in both real exchange rates and long term but not shortterm real interest differentials these two series do not appear to be linearly cointegrated hence the nonstationarity or near nonstationarity in the two series cannot be attributed to the same factor in section i we briefly describe a class of small scale monetary models of exchange rate determination the importance of this class of models for empirical work derives from its strong predictions about how the exchange rate will move

a model of speculative efficiency with news error components this paper proposes a theoritical model to assess of news on the spot forward exchange rate relationship and thereby predicts of the impact of news on the exchange rate two types of news are analysed rational expectations type innovations and announcement effects form newspapers by using historical data form a time period which includes the german hyperinflation of the early 1920s an estimate from of the model is derived which is substantially simpler than the version requried using contemporary data preliminary results support the main theoretical predictions but also cast some doubt on a literal interpretation of the exchange rate model plus rational expectations

the long run behavior of the real exchange rate a reconsideration using a new statistical test this paper provides empirical evidence that the real exchange rate is not a random walk if the real exchange rate were a random walk deviations from purchasing power parity could be expected to become unbounded as the forecast horizon became longer recently christopher a sims proposed a test based on bayesian posterior odds ratios that is designed to discriminate between a unit root and a large but stationary autocorrelation coefficient this paper applies the sims test to real exchange rate data for six industrial countries the results reject the random walk hypothesis copyright 1992 by ohio state university press

econometric modelling in the presence of evolutionary change a methodology is offered which can be used to construct an econometric model in the presence of structural change of an evolutionary type the theoretical basis for such modelling is drawn from the self organisation approach and operationalised in the context of the logistic diffusion growth model the latter is augmented to allow for the impact of exogenous effects upon both the diffusion rate and boundary limit we show how the hypothesis of augmented logistic diffusion can be falsified using econometric methods an illustrative case study is used namely the growth and decline of australian building society deposits with the aid of this example it is shown how the approach could be of use to both economic forecasters and regulators in conditions of structural change where conventional econometric methods are often inappropriate jel classification c51 c53 e42 e47 g18 o31

on money as a medium of exchange we analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo nash equilibria in trading strategies are characterized certain goods emerge endogenously as media of exchange or commodity money depending both on their intrinsic properties and on extrinsic beliefs there are also equilibria with genuine fiat currency circulating as the general medium of exchange we find that equilibria are not generally pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare velocity acceptability and liquidity are discussed

on the long run relationship between inflation and output in a spatial overlapping generations model abstract the paper builds a model that features spatial differentiation of markets and then uses it to study first the relationship between inflation and the steady state level of output and second the relationship between inflation and the steady state distribution of output across the economy a steady state of the model entails a stationary distribution of money across the locations of the economy with all else held fixed a change in the rate of money growth induces a change in the distribution of money which leads to a change in labour supply and production throughout the economy thus the distribution of money provides a channel through which a change in monetary policy affects real economic activity

the price effects of monetary shocks in a network economy abstract empirical evidence shows monetary shocks have two temporary effects on the distribution of prices one the dispersion of cross section of prices increases in response to monetary shocks two some prices change in the wrong direction some prices decrease in response to positive monetary shocks and increase in response to negative monetary shocks we present a model that generates the two effects of monetary shocks on the distribution of prices as an out of equilibrium phenomena firms are related to each other through a production network monetary shocks change the working capital of a subset of firms and percolate to other firms through buyer seller linkages price dispersion increases because the percolation of a monetary shock through the production network causes prices to differentially deviate from their steady state values some prices change in the wrong direction because a shift in one firm s demand causes a shift in another firm s supply and vice versa thereby generating complicated chains of bi directional price changes monetary shocks can significantly disturb relative prices even when all prices are fully flexible

threshold cointegration and purchasing power parity in the pacific nations the paper uses a threshold cointegration methodology to explore the properties of long run purchasing power parity ppp in the pacific nations using japan and the usa as base countries it is shown that long run ppp holds for most asian countries but that the adjustment mechanism is asymmetric in contrast to symmetric error correction models it is found that asymmetric adjustments of nominal exchange rates play an important role in eliminating deviations from long run ppp

structural breaks in parallel markets the case of nigeria 1980 1993 abstract this paper demonstrates the importance of allowing for structural breaks in the time series when investigating the relationship between the official and the parallel markets in foreign exchange only when structural breaks are accounted for does a relationship emerge in nigeria we find that over the period 1980 1993 the official rate has granger caused the parallel rate

revisiting purchasing power parity for east asian countries using the rank test for nonlinear cointegration this study applies a simple and powerful nonlinear rank test proposed by breitung 2001 to test the validity of long run purchasing power parity ppp in a sample of east asian countries over the period march 1985 september 2008 the empirical results indicate that ppp holds for all of east asian countries studied and the nominal exchange rate domestic consumer price index cpi and the us cpi are all linearly interrelated with the exception of china our results have important policy implications for these east asian countries under study

an empirical examination of long run purchasing power parity using cointegration techniques 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

two illustrations of the quantity theory of money of two central implications of the quantity theory of money that a given change in the rate of change in the quantity of money induces i an equal change in the rate of price inflation and ii an equal change in nominal rates of interest the illustrations were obtained by comparing moving averages of the three variables in question using quarterly u s time series for the period 1953 77 readers may find the results of interest as additional confirmation of the quantity theory as an example of one way in which the quantity theoretic relationships can be uncovered via atheoretical methods from time series which are subject to a variety of other forces or as a measure of the extent to which the inflation and interest rate experience of the postwar period can be understood in terms of purely classical monetary forces the theoretical background of the study is reviewed very briefly as it is familiar material in the next section the data processing methods are described and rationalized in section ii the illustrations

common stochastic trends in a system of exchange rates univariate tests reveal strong evidence for the presence of a unit root in the univariate time series representation for seven daily spot and forward exchange rate series furthermore all seven spot and forward rates appear to be cointegrated that is the forward premiums are stationary and one common unit root or stochastic trend is detectable in the multivariate time series models for the seven spot and forward rates respectively this is consistent with the hypothesis that the seven exchange rates possess one longrun relationship and that the disequilibrium error around that relationship partly accounts for subsequent movements in the exchange rates a general consensus has emerged in recent years that many macroeconomic time series such as gnp consumption expenditures disposable income etc can be characterized by a stochastic trend model in particular nelson and plosser 22 described this property as one of being difference stationary so that the first difference of a time series is stationary an alternative trend stationary model where a stationary component is added to a deterministic trend term has generally been found to be less appropriate 1 similarly it has long been recognized that many financial time series such as foreign exchange rates are nonstationary e g in meese and singleton 21 the issue of nonstationary is not merely a statistical curiosity but has several important implications for the modeling of exchange rates for instance many models of exchange rate determination under rational expectations require stationarity assumptions when solving out the expected future values of the fundamentals further there has been some controversy over the appropriate transformations to use when conducting tests of whether the forward rate is an unbiased and efficient predictor of the future spot exchange rate 2 some authors e g frenkel 11 12 have conducted tests in levels while geweke and feige 14

covered interest rate arbitrage in the interwar period and the keynes einzig conjecture keynes 1923 conjectured that deviations from covered interest rate parity would not be arbitraged unless a profit of at least a half of one percent on an annualized basis was available and that larger deviations would still be moderately persistent because of less than perfect elasticity of supply of arbitrage funds this two part conjecture was given further emphasis by other writers on this period notably einzig 1937 we apply nonlinear econometric techniques to a previously unexploited weekly data base for the 1920s london and new york markets and find strong support for the conjecture

purchasing power parity in the long run a cointegration approach this paper utilizes cointegration analysis to examine purchasing power parity relationships over a long time horizon the results indicate that the exchange rate is cointegrated strongly with the wholesale price index ratio and somewhat weakly with the consumer price index ratio the cointegrating coefficient between the exchange rate and the price ratio is close to one when cointegration is confirmed the hypothesis that the real exchange rate follows a random walk is rejected in most cases finally a new test for common trends finds no such common trends in exchange rates or price ratios copyright 1990 by ohio state university press

heterogeneity redistribution and the friedman rule we study monetary models with nondegenerate stationary distributions of money holdings we find that the friedman rule does not typically maximize ex post social welfare an increase in the rate of growth of the money supply has two effects the standard distortionary or rate of return effect makes money a less desirable asset for all moneyholders a second redistributive effect creates a transfer from one type of agent to the other an increase in the rate of growth of money away from the friedman rule can produce a rate of return effect that dominates the standard effect

unit roots and the real exchange rate before world war i the case of britain and the usa abstract unit root and cointegration tests indicate that the dollar pound real exchange rate was stationary during the us greenback and gold standard periods purchasing powwer parity ppp performed about equally well in the two periods and better than in recent years deviations from ppp were corrected by changes in british prices and us gold dollar prices greenback prices did not adjust the similarity of the adjustment parameters in the two periods suggests that expectations of a return to gold were embedded in the greenback price of gold

a search theoretic approach to monetary economics the essential function of money is its role as a medium of exchange the authors formalize this idea using a search theoretic equilibrium model of the exchange process that captures the double coincidence of wants problem with pure barter one advantage of the framework described here is that it is very tractable the authors also show that the model can be used to addre ss some substantive issues in monetary economics including the potenti al welfare enhancing role of money the interaction between specializat ion and monetary exchange and the possibility of equilibria with multip le fiat currencies copyright 1993 by american economic association

real exchange rate behavior abstract using random simulations with artificial data with identical sample characteristics to the long sample exchange rate data employed by lothian and taylor lothian j r and taylor m p 1996 the recent float from the perspective of the past two centuries journal of political economy 104 488 509 we show that standard unit root tests have extremely low power over sample sizes corresponding to the recent float the probability of rejecting the null hypothesis when it is false is extremely low with 20 years or even 50 years of data and only reaches an acceptable level over much longer spans

relative ppp in the medium run abstract this paper tests the relative purchasing power parity rppp hypothesis on month by month post 1972 data and still obtains regression coefficients that are close to unity two methodological aspects have contributed to this encouraging result firstly although all rppp tests are vis a vis the usa we nevertheless exploit our a priori knowledge about the implications of these usd based equations on ppp relations between cross rates so in a sense we use all information implicit in all cross rates too secondly we selected an instrumental variable that is specifically designed to cope with lead and lag effects in non traded vs traded goods inflation our estimates indicate that most lead and lag effects seem to occur within a six month window jel f31

capital market integration in the pacific basin region an impulse response analysis abstract we examine the extent of capital market integration in a group of pacific basin countries following the deregulation of their markets and explore whether the financial influence of japan in the region has overtaken that of the us looking at long run comovements of real interest rates through the use of cointegration and using impulse response analysis to examine the speed of adjustment of real interest rates to long run equilibrium following a shock in one of the markets which is another indicator of the degree of capital market integration we find that these countries are closely linked with world financial markets and more so with japan than with us

real exchange rate behavior the recent float from the perspective of the past two centuries using annual data spanning two centuries for dollar sterling and franc sterling real exchange rates we find strong evidence of mean reverting real exchange rate behavior using simple stationary autoregressive models estimated on prefloat data we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float such stationary univariate equations explain 60 80 percent of the in sample variation in real exchange rates although the degree of short run persistence may be high the econometric estimates imply a half life of shocks to the real exchange rate of about 6 years for dollar sterling and a little under 3 years for franc sterling

viewpoint a microfoundation of monetary economics in this lecture i explain what the microfoundations of money are about and why they are necessary for monetary economics then i review recent developments of a particular microfoundation of money commonly known as the search theory of money finally i outline some unresolved issues dans cette presentation l auteur explique ce que sont les microfondations de la monnaie et pourquoi elles sont necessaires a l economie monetaire ensuite il passe en revue certains developpements recents d une microfondation particuliere de la monnaie connue sous le nom de theorie de la recherche de la monnaie enfin l auteur fait le tour d un ensemble de problemes qui restent sans solution pour le moment

policy convergence the exchange rate mechanism and the misalignment of exchange rates some tests of purchasing power parity and generalized purchasing power parity the paper focuses on the convergence issues and the long run credibility of the european monetary system ems and more specifically on the evaluation of the effectiveness of the exchange rate mechanism erm in generating a stabilizing effect on real exchange rates across member countries for this purpose we execute some tests of long run purchasing power parity ppp for an erm group and a non erm group of countries using both the engle and granger procedure and the more powerful johansen cointegration technique we also execute a test of generalized ppp exploiting an idea developed by enders and hurn testing for ppp in a multicountry setting may be a useful methodology to identify the optimal currency area suggested by the data generation process on the basis of the reported homogeneity of real exchange rate behaviour of the countries considered

purchasing power parity under the european monetary system abstract using reduced rank cointegration analysis this study examines whether exchange rate realignments are effective in extenuating the deviations from purchasing power parity ppp under the european monetary system ems in contrast to previous studies more positive evidence for the ppp hypothesis is found the difference in findings can be attributed partly to the statistical technique used the correction of the finite sample bias and the adjustment for realignment effects in general the results of this study support that currency realignments of the ems have been effective in maintaining ppp among its member countries

equilibrium relationships between money and other economic variables central to the quantity theory of money are a number of important propositions about the long run equilibrium effects of changes in the nominal stock of money on other economic variables a standard way of testing these propositions is to use quarterly or annual data explicitly model the lag structure and then derive the long run solution of the model from the empirical estimates an alternative is to use some type of smoothing procedure to approximate positions of equilibrium and then to use these transformed data directly in testing hypotheses the national bureau technique of averaging data over reference cycle phases is one such method robert lucas s application of fourier transforms in two illustrations of the quantity theory of money 1980 is another and john geweke s method 1982 of frequency decomposition is a third an entirely different way of approaching the problem is to use cross country average rather than time series data as the basic units of observation the advantage according to lucas is that since the two quantity theoretic laws that he examines are obtained as characteristics of steady states or limiting distributions of theoretical models the ideal experiment for testing them would be a comparison of long term average behavior across economies with different monetary policies but similar in other respects p 1006 in this paper i conduct such an experiment the data that i use are for 20 oecd countries over the period 1956 80 the specific relationships that i examine are those between money and the price level money and real income money and interest rates and money and exchange rates in the main the data accord well with the quantity theoretic model classical neutrality holds there is evidence of a fisher effect albeit a less than complete effect on interest rates finally the data are consistent with long run purchasing power parity and hence correspondingly with a long run monetary approach to exchange rate determination

purchasing power parity and the canadian float in the 1950s in this paper the authors present evidence that neither large differences in inflation nor long time periods are necessary for a finding favorable to purchasing power parity evidence from cointegrating regressions and tests of the real exchange rate indicate that purchasing power parity held as a long run constraint between the united states and canada for the period 1950 10 to 1961 5 the authors also find that government intervention can distort purchasing power parity over a finite period once the data were extended beyond the period of the free float the evidence is no longer favorable to purchasing power parity copyright 1991 by mit press

flexible exchange rates prices and the role of news lessons from the 1970s recent experience with flexible exchange rate systems has led to renewed interest in the operation of foreign exchange markets as reflected in many recent studies of the principal determinants of exchange rates the 1970s witnessed the dramatic alteration of the international monetary system from a regime of pegged exchange rates which prevailed for about a quarter of a century since the bretton woods conference into a regime of flexible though managed rates as a consequence of the emergence of the new legal and economic system traders national governments and international organisations were confronted with new economic problems choices and instruments during the 1970s ex change rates fluctuated widely and inflation rates accelerated the international monetary system had to accommodate extraordinarily large oil related shocks which affected trade flows in goods and assets huge oil payments had to be recycled uncertainties concerning future developments in international politics reached new heights and the prospects for the world economy got gloomier these developments placed unprecedented pressures on the markets for foreign exchange as well as on other asset markets they were associated with a large slide in the value of the us dollar and resulted in speeding up the creation of new institutions like the european monetary system which provided the formal framework for the management of exchange rates among members

trade concentration openness and deviations from purchasing power parity abstract economists have often explained deviations from ppp in terms of random relative price changes while all countries are subject to such real shock empirical studies indicate that ppp seems to hold closer for some countries than others this paper emphasizes two major reasons why we should expect systematic differences across countries in deviations from ppp a the concentration of trade and b openness the more diversified trade the less susceptible the country to random shocks affecting individual goods so that shifts in the ppp ratio are lower the more open the economy the greater the weight of traded goods in the overall price indices so that if exchange rates are determined by traded goods prices yet empirical tests of ppp use national price indices ppp should hold better in more open economies

the black market for dollars in chile abstract this study investigates the effects of foreign exchange restrictions on the black market premium for dollars in chile over the period 1975 1984 the model emphasises the interaction of stock and flow conditions in the black market for dollars our results support the view that the real exchange rate the official depreciation adjusted interest rate differential the dollar value of peso assets valued at the official exchange rate and foreign exchange restrictions are important determinants of the black market premium

a unified framework for monetary theory and policy analysis search theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential however tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis we propose a new framework based on explicit micro foundations within which macro policy can be studied the framework is analytically tractable and easily quantifiable we calibrate the model to standard observations and use it to measure the cost of inflation we find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption much higher than previous estimates

a model of exchange rate dynamics this model treats the exchange rate as an asset price that depends on expectations concerning exogenous real and monetary factors that will affect relative prices and absolute price levels in future periods changes in exchange rates reflect both expected changes in these exogenous factors and changes in expectations occasioned by new information the model explains the random component in exchange rate behavior the source of divergences from purchasing power parity the anticipatory response of exchange rates to future expected disturbances and the causes of exchange rate overshooting

on unit roots and real exchange rates empirical evidence and monte carlo analysis this paper presents some empirical evidence that real exchange rate series contain a unit root in their time series respresentation which cancels out on first differencing using the augmented dickey fuller test the power of this test is also tested using monte carlo methods and it is found to be quite powerful against a range of stationary local alternatives the findings imply the absence of any tendency of the nominal exchange rate to converge on purchasing power parity even in the long run

transactions costs and nonlinear adjustment in real exchange rates an empirical investigation eolquilibrium models of real exchange rate determination in the presence of transactions costs imply a nonlinear adjustment process toward purchasing power parity ppp conventional cointegration tests which ignore the effect of transactions costs may be biased against the long run ppp hypothesis our results using both monthly data for the interwar period and annual data spanning two centuries clearly reject the linear framework in favor of an exponential smooth transition autoregressive process the systematic pattern in the estimates of the nonlinear models provides strong evidence of mean reverting behavior for ppp deviations and helps explain the mixed results of previous studies

understanding the empirical literature on purchasing power parity the post bretton woods era abstract this paper argues that the empirical failure of statistical tests of ppp in post bretton woods data is largely due to the low power of the tests employed this result is demonstrated using monte carlo experiments on the size and power of different testing procedures a new procedure based on horvath and watson econometric theory 11 pp 984 1014 1995 has greater power than previous approaches using the horvath watson procedure we find moderate evidence in favor of ppp in the post bretton woods era