mean reversion in real exchange rates evidence and implications for forecasting abstract the stationarity of real exchange rates over the recent flexible exchange rate period is an issue that has long bedeviled researchers in international finance using a constrained multivariate framework this paper provides the strongest evidence yet that real exchange rates were mean reverting over the 1973 93 period we also investigate shifts in long run real exchange rates which may be important for the purpose of forecasting out of sample forecasting shows that the random walk model is outperformed by a mean stationary model especially at long horizons in addition there are substantial forecasting benefits from using a multivariate approach

purchasing power parity modeling and testing mean reversion abstract a model of mean reversion of exchange rates to purchasing power parity is developed and tested where exchange rates are assumed to follow a mean reverting elastic random walk toward a stochastic ppp rate the model recognizes the possibility that mean reversion towards ppp may be nonlinear which allows greater flexibility in the adjustment process regression equations consistent with the theoretical model are derived the model is tested using long and short term data for six countries while the results are generally consistent with the findings of previous studies evidence is presented which demonstrates that the mean reversion process is not linear for some countries

sources of real exchange rate fluctuations empirical evidence from four pacific basin countries in international finance the competing hypothesis that the logarithms of real exchange rates appear to be well described as random walks during a period of floating rate has found some support studies by adler and lehmann 2 hakkio 12 and mark 18 are examples of work supporting this view if a real exchange rate process has been approximated to be non stationary it implies there is little tendency for the real exchange rate to be mean reverting and also that deviations from the purchasing power parity ppp are permanent modern models of exchange rate determination suggest that real shocks can induce permanent changes in the real exchange rate stockman 21 pointed out that according to the equilibrium approach the behavior of real exchange rates since the collapse of bretton woods could reflect not the importance of sluggish price level adjustment but rather the influence of real shocks with significant permanent components moreover the evidence in campbell and clarida 5 and huizinga 13 suggests that real exchange rates contain both permanent and transitory components with most of their variation explained by the permanent components however recent studies employing long run data or more powerful tests tend to confirm the ppp hypothesis studies by abuaf and jorion 1 kim 16 whitt 22 and diebold husted and rush 7 are four such examples their evidence shows that real exchange rates are stationary which implies that the behavior of real exchange rates are influenced by transitory nominal disturbances hence the validity of ppp remains at issue identifying the sources of exchange rate fluctuations is important not only for establishing the validity of ppp but also for achieving successful exchange rate stabilization attempts to stabilize exchange rate changes that are due to economic fundamentals could be futile and even harmful to the economy in addition measuring the relative importance of permanent and transitory shocks on exchange rates is essential for exchange rate modeling if exchange rates are dominated by real shocks then the equilibrium approach offered by stockman 21 is appropriate in analyzing the behavior of exchange rates conversely if the evidence suggests the contrary then the disequilibrium approach of dornbusch 8 should be considered as an alternative as a consequence

further long memory properties of inflationary shocks several previous studies have found fractionally integrated or long memory behavior in the conditional mean of inflation this paper notes that extremely similar phenomena are also apparent in the squared and absolute values of residuals from fractionally filtered inflation series hence the inflation process appears to have a dual long memory feature in both its first and its second conditional moments we suggest a parametric model of long memory in both the conditional mean and the conditional variance some monte carlo evidence is presented that supports estimation of the model by approximate maximum likelihood methods we then report estimated models for the inflation series for several different industrialized countries including the united states for nearly all of the countries in our study there is strong evidence of statistically significant long memory parameters in both the conditional mean and the variance we note some of the implications for modeling inflation

the ricardian equivalence hypothesis evidence from bangladesh this article examines the ricardian equivalence hypothesis reh and its sources of failure in the case of bangladesh using various theoretical specifications annual data from 1974 2001 and linear and nonlinear time series techniques the general findings tend to invalidate the reh a finite time horizon and the presence of liquidity constrained individuals are the sources of deviation from the reh empirical results reveal that real per capita private consumption c under various specifications is cointegrated generally at the 5 level with real per capita income y government expenditure before and after interest rate repayments g and g2 taxes t and the interest rate r results reveal that an increase in g g2 t and r reduces c and that an increase in budget deficits raises trade deficits these results highlight the importance of fiscal policies in boosting private consumption and controlling trade deficits which are the prime goals of stabilization policies being followed by bangladesh

ricardian equivalence expansionary fiscal contraction and the stock market a vecm approach the effect of government taxation on future consumption has been explained in three ways the keynesian approach the ricardian equivalence proposition and the german view of expansionary fiscal contraction efc this paper reports empirical evidence on the validity of these explanations by examining the impact of a shock in government taxation upon private consumption once the effect of the stock market is removed a vector error correction model is estimated for the usa japan germany france the uk italy and canada for 1950 1997 and the impulse response functions of a shock in taxation and in expenditure are examined the responses to an increase in government taxation appear to lend support to the efc while the responses to an increase in government expenditure upon consumption suggest that the reaction of private consumption is more in line with the traditional keynesian approach

median unbiased estimation in df gls regressions and the ppp puzzle using median unbiased estimation recent research has questioned the validity of rogoff s remarkable consensus of 3 5 year half lives of deviations from ppp these half life estimates however are based on estimates from regressions where the resulting unit root test has low power we extend median unbiased estimation to the df gls regression of elliott rothenberg and stock 1996 we find that median unbiased estimation based on this regression has the potential to tighten confidence intervals for half lives using long horizon real exchange rate data we find that the typical lower bound of the confidence intervals for median unbiased half lives is just under 3 years thus while previous confidence intervals for half lives are consistent with virtually anything our tighter confidence intervals now rule out economic models with nominal rigidities as candidates for explaining the observed behavior of real exchange rates therefore while we obtain more information using efficient unit root tests on longer term data this information moves us away from solving the ppp puzzle

the japanese deflation has it had real effects could it have been avoided has deflation contributed to the long lasting stagnation of the japanese economy could the bank of japan have stopped deflation by implementing a more expansionary monetary policy tentative answers are probably not to the first question and probably yes to the second question it is found that the total cost of deflation over the period 1995 2003 has been close to a 1 1 rate of lost gdp yet on the basis of statistical significance and robustness to specification choices this evidence is not compelling on the other hand the estimated positive linkage between nominal base money growth and inflation is significant and robust even given current economic conditions however in order to be inflationary monetary policy should have been more expansionary than what actually observed even since the launch of the quantitative easing in 2001

inflation persistence and nonlinearities in central and eastern european countries abstract in this paper we provide an insight into the inflation dynamics in a panel of central and eastern european countries applying unit root tests and allowing for nonlinearities we show that inflation rates in more than half of these countries are stationary

on the persistence of prices in mexico a fractional integration approach abstracta relevant yet often overlooked characteristic of the inflation rate is its mean reverting property if a series has this feature shocks eventually dissipate whereas if it does not they have a permanent effect on the series the usual i 1 versus i 0 dichotomy in time series econometrics goes only so far towards disentangling this issue by employing a methodology that estimates the persistence of inflation by allowing i fractional integration and ii persistence and level shifts in the series we aim to define whether it is stationary and or mean reverting and if so during which periods the results of our analysis for the period 1987 2015 are threefold firstly inflation in the eighties and nineties should be seen as a highly persistent yet mean reverting process not a random walk secondly inflation remained mean reverting though became a short memory less persistent process around the date of the implementation of the inflation targeting framework of 2001 thirdly during the l

dynamics of persistence in international inflation rates characteristics of inflation play a key role in policy formulation and market analysis several studies have analyzed inflation persistence and reached diverging conclusions in this paper we investigate the dynamics of inflation persistence using fractionally integrated processes and find that there has been a clear decline in inflation persistence in the united states over the past two decades we also show that the presence of fractional integration in inflation successfully explains previous diverging results lastly we provide some international comparisons to examine the extent to which there has been a commensurate decline in inflation persistence in the other g7 economies

government deficits and aggregate demand abstract the evidence presented in this paper indicates that changes in government spending transfers and taxes can have substantial effects on aggregate demand the estimates also indicate that the promise of future social security benefits significantly reduces private saving each the basic implications of the so called ricardian equivalence theorem is contradicted by the data the results are consistent with the more general view of the effects of fiscal actions and fiscal expectations that is described in the paper

can exchange rate variations or trade policy alter the equilibrium current account abstract paul krugman has pointed out that much work needs to be done before the intertemporal open economy model can replace the open economy is lm model as a guide to policy making the objective here is to take a step in this direction by examining if an exogenous increase in world demand for home goods as via trade policy can improve the equilibrium current account within an open economy intertemporal model in the process the paper explores the theoretical issue as to whether a variation in the real exchange rate can alter the difference between saving and investment the key idea is that uncovered interest parity plus some degree of mean reversion in the real exchange rate imply that a modern version of the laursen metzler harberger effect is operative the result is that a policy induced increase in the trade balance will alter the real exchange rate which in turn increases the difference between home saving and investment and thereby improves the equilibrium current account

multi country evidence on the behavior of purchasing power parity under the current float abstract using panel data for the united states and 22 other oecd countries for the current float this paper presents evidence that despite substantial short term perturbations purchasing power parity actually performed much better than commonly believed average rates of growth of real exchange rates over long horizons bear little relationship either to average rates of growth of nominal exchange rates or to average inflation differentials thus implying a close to one to one relation between average rates of growth of nominal exchange rates and average inflation differentials panel data variants of standard unit root tests suggest that the real exchange rates of these countries can be characterized as mean reverting

restaurant prices and the mexican peso 1 introduction balance of payment concerns facing latin american economies have caused international currency valuations to receive ongoing scrutiny throughout the past decade and a half given its importance to regional economic performance border areas between countries such as the united states and mexico canada and the united states colombia and venezuela and ecuador and colombia also monitor exchange rate developments very closely typically one of two types of monitoring tools have been utilized for formal econometric work in this branch of international economics nominal purchasing power parity ppp indices and trade weighted real exchange rates both of the latter rely on easily obtained macroeconomic data a widely cited exception to those macroeconomic data approaches is published quarterly by the economist magazine utilizing hamburger prices from a well known restaurant corporation with worldwide franchises the research at hand develops a similar tool utilizing a variety of international restaurant franchises with operations in el paso texas and ciudad juarez chihuahua on the border between the united states and mexico more than 70 signature menu item prices are sampled every month in order to develop an exchange rate measure based on the so called law of one price hypothesis parametric and nonparametric statistical testing is then conducted to examine whether the border restaurant price ratio bears any relationship to the exchange rate value of the peso over the 36 month sample period for which data are available july 1997 june 2000 section 2 of the paper includes a literature review data and methodology are described in section 3 section 4 provides an empirical analysis of the results concluding remarks and suggestions for future research are included in section 5 2 literature review exchange rate monitoring has become a staple of international corporate and public policy analysis in the two plus decade period subsequent to the demise of the bretton woods fixed exchange rate system a common approach is the measurement of trade weighted real exchange rates designed for country risk analysis and balance of payments pressure gauging such indexes will generally indicate overvaluation with respect to a preselected base with values in excess of 100 and undervaluation with values below 100 batten and belongia 1986 fullerton 1989 another practice is the calculation of theoretical nominal exchange rates under a ppp approach beltran del rfo 1999 the latter are often popular among financial market analysts because they are defined in the actual units in which trades are conducted international restaurant franchise menu pricing has given rise to a new empirical variant on the law of one price in recent years the economist magazine runs a periodic comparison of hamburger prices to nominal exchange rates for a group of 20 plus countries the economist 1998 hamburger prices in local currency units are divided by a corresponding dollar price whenever the resulting price ratio is higher than the exchange rate it implies that the local currency is overvalued when the ratio is below the prevailing exchange rate it implies the opposite the popularity of this readily identifiable index has spawned several subsequent studies that study both geographic and time series characteristics and implications of the approach while cumby 1996 and ong 1997 find fairly good evidence in favor of the hamburger index pakko and pollard 1996 conclude that nontradability and institutional factors cause it to perform unreliably a growing number of studies examine the ppp principle using data that involve more than one product and take into account geographic factors such as distance engel and rogers 1996 parsley and wei 2000 in one such effort james gerber sampled individual menu items from seven restaurants in san diego and tijuana regents of the university of california 1997

a nonparametric measure of convergence towards purchasing power parity it has been claimed that the deviations from purchasing power parity are highly persistent and have quite long half lives under the assumption of a linear adjustment of real exchange rates however inspired by trade cost models nonlinear adjustment has been widely employed in recent empirical studies this paper proposes a simple nonparametric procedure for evaluating the speed of adjustment in the presence of nonlinearity using the largest lyapunov exponent of the time series the empirical result suggests that the speed of convergence to a long run price level is indeed faster than what was found in previous studies with linear restrictions copyright 2006 john wiley sons ltd

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

cointegration fractional cointegration and exchange rate dynamics multivariate tests due to johansen 1988 1991 as implemented by baillie and bollerslev 1989a and diebold gardeazabal and yilmaz 1994 reveal mixed evidence on whether a group of exchange rates are cointegrated further analysis of the deviations from the cointegrating relationship suggests that it possesses long memory and may possibly be well described as a fractionally integrated process hence the influence of shocks to the equilibrium exchange rates may only vanish at very long horizons in the article by baillie and bollerslev 1989a it is argued that seven different nominal spot and forward exchange rates all contain unit roots in their univariate time series representations at the same time however the spot exchange rates appear to be tied together in the long run through a cointegration type relationship the latter finding of baillie and bollerslev has attracted particular interest and several studies such as those by hakkio and rush 1991 and sephton and larsen 1991 have already addressed this issue using the same data as the baillie and bollerslev article sephton and larsen 1991 describe the evidence for the presence of cointegration as being fragile and note that mixed conclusions are reached by truncating the baillie and bollerslev sample at different points in time diebold gardeazabal and yilmaz 1994 henceforth diebold et al provide interesting evidence that application of the johansen 1988 1991 tests with and without an intercept will result in different inferences on the baillie and bollerslev data set furthermore diebold et al carry out an ex ante forecasting experiment and find that the addition of an error correction term to the martingale model as implied by the standard cointegration paradigm fails to reduce the prediction mean square error when compared to a simple martingale model this therefore leads diebold et al to conclude that there exists substantial uncertainty regarding the existence of cointegration relationships among nominal dollar exchange rates this article provides some additional evidence on the existence of such a long run relationship among the same seven nominal spot exchange rates after further analysis it appears that a form of cointegration does exist between the exchange rates so that they do not drift apart in the long run we argue that this form of cointegration is

mean reversion in real exchange rates a modified dickey fuller test which is approximately uniformly most power invariant is employed to examine mean reversion in real exchange rates results from this test provide a wider and more significant support for mean reversion than the standard dickey fuller test

international commodity agreements design and performance abstract this article traces the design and performance of the five currently or recently active international commodity agreements icas in cocoa coffee natural rubber sugar and tin following detailed discussion of each of these the author makes three observations that icas can only be successful provided that they command a consensus in their industries that existing agreements are not robust enough with regard to exchange rates and that existing agreements are poorly drafted the author argues that the collapse of the tin agreement in october 1985 may have marked the end of the postwar chapter in the commodity intervention story he finds it improbable that new icas will emerge and suggests instead that more of the existing agreements will lapse

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

testing for the long run relationship between nominal interest rates and inflation using cointegration techniques 1989 testing for the long run relationship between nominal interest rates and inflation using cointegration techniques applied economics vol 21 no 4 pp 439 447

consumption in developing countries tests for liquidity constraints and finite horizons adjustment programs in developing countries emphasize the importance of reducing fiscal deficits in order to improve aggregate saving and investment performance recent theoretical analyses associated with the ricardian equivalence proposition however suggest that changes in the level of public sector saving may be offset by a change in private saving the empirical relevance of this proposition depends among other things on the length of consumers horizons and on the extent to which households are liquidity constrained empirical tests of a consumption model for a sample of developing economies do not support the equivalence propositions owing to the prevalence of liquidity constraints copyright 1989 by mit press

on the substitutability between private consumer expenditure and government spending in canada the purpose of this paper is twofold first to examine whether there is any substitutability between private consumer expendit ure and government spending in canada second to test the ricardian equivalence principle both hypotheses are nested within the life cyc le rational expectations model the results indicate that the joint h ypothesis of rational expectations and ricardian equivalence can not be rejected by the data moreover they suggest that government spend ing substitutes poorly for private consumer expenditure these result s imply that temporary increases in government spending will result i n an expansion of real output

purchasing power parity over two centuries trends and nonlinearity in two recent contributions lothian and taylor and cuddington and liang produced empirical evidence that annual data for the dollar sterling real exchange rate spanning two centuries exhibited a non linear deterministic trend this trend could be proxying harrod balassa samuelson effects lothian and taylor showed that a linear stationary autoregressive mode which embodied a cubic trend implied much faster mean reversion of the real exchange rate to shocks than a model that excluded the trend this article shows that both non linearity and a deterministic trend can be allowed for in a theoretically appealing manner and that the fitted models provide a parsimonious explanation of both the dollar sterling and franc sterling real exchange rates over the two centuries of data generalized impulse response function analysis of the models demonstrates that the speed of adjustment to shocks can be even faster when trends are considered

the permanent income hypothesis estimation and testing by instrumental variables the permanent income hypothesis with rational expectation is restated estimated and tested by an instrumental variables technique on the postwar u s aggregate time series data the hypothesis is accepted on a consumption series which includes service flows from consumer durables if the consumption series is the one in the national income and product accounts the hypothesis is decisively rejected an explanation is suggested to reconcile the conflicting test results

long memory and nonlinear mean reversion in japanese yen based real exchange rates abstract the extraordinary difficulty in uncovering parity reversion in yen based real exchange rates has often been ascribed to a missing trend variable this study identifies an alternative explanation and shows that the puzzling behavior of real yen rates may stem from long memory dynamics which undermine unit root tests in their ability to detect mean reversion the long memory findings are consistent with the long swings in yen exchange rates during the current float further analysis also reveals evidence of non monotonic reversion toward parity

the long run fisher effect can it be tested empirical support for the long run fisher effect a hypothesis that a permanent change in inflation leads to an equal change in the nominal interest rate has been hard to come by this paper provides a plausible explanation of why past studies have been unable to find support for the long run fisher effect this paper argues that the necessary permanent change to the inflation rate following a monetary shock has not occurred in the industrialized countries of australia austria belgium canada denmark france germany greece ireland italy japan the netherlands norway sweden switzerland the united kingdom and the united states instead this paper shows that inflation in these countries follows a mean reverting fractionally integrated long memory process not the nonstationary inflation process that is integrated of order one or larger found in previous studies of the fisher effect applying a bivariate maximum likelihood estimator to a fractionally integrated model of inflation and the nominal interest rate the inflation rate in all seventeen countries is found to be a highly persistent fractionally integrated process with a positive differencing parameter significantly less than one hence in the long run inflation in these countries will be unaffected by a monetary shock and a test of the long run fisher effect will be invalid and uninformative as to the truthfulness of the long run fisher effect hypothesis

long memory in inflation rates international evidence we examine monthly inflation rates of five industrial countries the application of tests against stationarity as well as tests against a unit root yield contradictory results thus fractional integration allowing for long memory is a plausible model we discuss and apply the periodogram regression to estimate the difference parameters for all countries we find estimates significantly different from 1 as well as from 0 this is evidence in favor of long memory specification tests and maximum likelihood estimates support the fitted models finally we relate our empirical results to the construction of the data

the long run volatility puzzle of the real exchange rate abstract this paper documents large cross country differences in the long run volatility of the real exchange rate it shows that the real exchange rate of developing countries is approximately three times more volatile than the real exchange rate in industrial countries the paper shows that this difference in volatility cannot be explained by the fact that developing countries face larger shocks both real and nominal recurrent currency crises or by different elasticities to these shocks arch estimations find a much higher persistence of deviations of the variance of the rer from its long run value when the economy suffers shocks of various kinds

on cross country differences in the persistence of real exchange rates abstract previous findings of long run purchasing power parity come mainly from data for industrial countries raising the issue of whether the results suffer sample selection bias and exaggerate the general relevance of parity reversion this study uncovers substantial cross country heterogeneity in the persistence of deviations from parity the results show that it is more likely rather than less likely to find parity reversion for developing countries than industrial countries although some persistence variations may partly reflect country differences in structural characteristics such as inflation experience and government spending a considerable portion of those variations seems unaccounted for

on exchange rates nominal and real abstract the paper first develops an australian commodity currency exchange rate model which is extended to deal with real exchange rates as well the nominal and real exchange rate versions are then tested on swiss data for the post bretton woods period while the model tracks the swiss franc nominal exchange rate vis a vis the dollar and the major european currencies very well swiss ppp real exchange rates are found to be heavily contaminated with measurement error as that error explains the large co movements in nominal and ppp real exchange rates those co movements are largely irrelevant to the ppp debate

cointegration how short is the long run abstract when testing for cointegration and faced with short sample periods it is common for researchers to turn to more frequently sampled observations that is to move from annual to quarterly or monthly data in order to increase the number of observations we argue that such a gain in the degrees of freedom is more apparent than real essentially cointegration is a long run concept and hence requires long spans of data to give tests for cointegration much power rather than merely large numbers of observations using monte carlo simulations we demonstrate this for four popular tests for cointegration

fiscal policy and national saving this paper uses structural vector autoregressions along with structural measures of fiscal policy to measure the dynamic impact of fiscal policy shocks on the output gap and national saving positive shocks to government purchases and negative shocks to real net taxes are found to increase the output gap positive shocks to the government s structural surplus increases national saving although the effects are small positive shocks to government purchases are found to substantially reduce national saving negative shocks to real net tax revenues as a share of potential gdp have a small negative impact on national saving

long memory in us disaggregated petroleum consumption evidence from univariate and multivariate lm tests for fractional integration previous studies that have tested for a unit root in aggregate energy consumption have potentially reached misleading conclusions because they fail to allow for the possibility that energy consumption might be fractionally integrated and do not distinguish between different types of energy consumption this study tests for long memory in disaggregated petroleum consumption in the united states using univariate and multivariate lagrange multiplier lm tests for fractional integration the results point strongly to the need to distinguish between different forms of energy consumption and allow for a generalization of the i 0 i 1 dichotomy when considering the order of integration of energy consumption allowing for short run dynamics the univariate test suggests that less than 50 of the series are fractionally integrated consistent with expectations the non stationary series are found to have the highest mean and standard deviation the multivariate test suggests that petroleum consumption in the commercial and industrial sectors is clearly fractionally integrated when allowing for short run dynamics and as such exhibits persistent effects while petroleum consumption in the residential sector is a stationary process

aggregate consumption and deficit financing an attempt to separate permanent from transitory effects many previous empirical studies of the ricardian equivalence hypothesis have found a relatively high degree of future tax liability discounting such that current deficits appear to have relatively little or no influence on current consumption demand however the validity of these empirical estimates can be questioned as they may not have adequately distinguished between permanent and transitory income flows this paper attempts to address this problem by using cycle averaging as a simple method of capturing the permanent path of income over time the empirical evidence generated in this paper rejects the strict debt neutrality proposition of the ricardian equivalence hypothesis

haircuts or hysteresis sources of movements in real exchange rates abstract we empirically assess the importance of two sources of real exchange rate movements in models where ppp holds only among traded goods real exchange rate variation results from relative price movements within countries an alternative explanation relies on hysteretic price setting and nominal exchange rate changes using disaggregated price data from 11 oecd nations we find some support for the non traded goods models for example prices of haircuts in canada and the united states are unrelated in the long run we find stronger evidence to support models that emphasize sticky prices transportation costs or other impediments to frictionless trade

real exchange rates under the gold standard can they be explained by the trend break model abstract we investigate whether real exchange rates under the gold standard can be modeled as stationary around a broken trend using both conventional unit root and sequential trend break tests we clearly reject the unit root null for 14 of the 16 exchange rates studied by diebold husted and rush journal of political economy 1991 99 and provide some evidence against a unit root for another we interpret our results as being complementary to the evidence for fractional integration found by diebold husted and rush in both cases the unit root null can be decisively rejected if the alternative is more flexible than a deterministic trend without breaks

testing ricardian neutrality with an intertemporal stochastic model this paper s purpose is to develop and estimate a stochastic intertemporal model of consumption be havior and to use it for testing a version of the ricardian equivalen ce proposition with time series data two channels that may give rise to deviations from this proposition are specified finite horizons a nd liquidity constraints in addition the model incorporates explici tly the roles of taxes substitution between public and private consu mption and different degrees of consumer goods durability the evid ence based on data for israel in the first half of the 1980s suppor ts the ricardian neutrality specification yielding plausible estimat es for the behavioral parameters of the aggregate consumption functio n copyright 1988 by ohio state university press

the fisher hypothesis and the forecastability and persistence of inflation abstract for the period 1860 to 1939 the simple correlation of the u s commercial paper rate with the contemporaneous inflation rate is 0 17 the corresponding correlation for the period 1950 to 1979 is 0 71 this paper attributes this apparent change in the fisher relation to differences in the stochastic process of inflation rather than a change in any structural relationship between interest rates and expected inflation contrary to recent claims in the literature there is little evidence of inflation non neutrality in data from the pre world war i period

are higher levels of inflation less predictable a state dependent conditional heteroscedasticity approach milton friedman proposed that there is a positive relationship between inflation and uncertainty about the future path of inflation in contrast to previous studies of this hypothesis we find strong statistical evidence that higher levels of inflation are less predictable although innovations in inflation are somewhat better predictors of future volatility than the actual level of inflation we argue that previous failures to find an inflation uncertainty relationship are due to two factors first none of the previous work directly tested friedman s hypothesis by including the level of inflation in the model of the conditional variance second these studies also used symmetric models which appears inconsistent with friedman s hypothesis our results are robust to different sample periods and to assumptions about the presence of a unit root in inflation to test the inflation uncertainty hypothesis we use state dependent models sdm s of conditional moments to estimate the time varying conditional v

real exchange rates between the wars abstract bilateral real exchange rates are analyzed for fifteen countries over the period 1925 1937 using a benchmark invariant principal components technique for the period 1925 1931 half of real exchange rate variation originates from countries on floating exchange rates and half from price level differences between countries on the gold standard for the period 1931 1937 real exchange rate movements between the sterling bloc the european gold bloc and the us and canada appear dominant within bloc variation is secondary and mostly due to competitive devaluations our results support earlier evidence that the nominal exchange rate regime to a large extent determines real exchange rate variation

nonlinear purchasing power parity under the gold standard 1 introductionrecent theoretical analysis of purchasing power deviations see e g dumas 1992 sercu uppal and van hull 1995 and o connell and wei 1997 demonstrates how transactions costs or the sunk costs of international arbitrage induce nonlinear adjustment of the real exchange rate to purchasing power parity ppp globally mean reverting this nonlinear process has the important property of exhibiting near unit root behavior for small deviations from ppp since small deviations from ppp are left uncorrected if they are not large enough to cover the transactions costs or the sunk costs of international arbitrage a parametric nonlinear model suggested by the theoretical literature that captures the nonlinear adjustment process in aggregate data is the exponential smooth transition autoregression model estar of ozaki 1985 a smooth rather than discrete adjustment mechanism is motivated by the theoretical analysis of dumas 1992 also as postulated by terasvirta 1994 and demonstrated theoretically by berka 2002 in aggregate data regime changes may be smooth rather than discrete given that heterogeneous agents do not act simultaneously even if they make dichotomous decisions 1 recent empirical work e g michael nobay and peel 1997 taylor peel and sarno 2001 peel and venetis 2002 has reported empirical results that suggest that the estar model provides a parsimonious fit into a variety of data sets particular for monthly data for the interwar and postwar floating period as well as for annual data spanning 200 years as reported in lothian and taylor 1996 in addition nonlinear impulse response functions derived from the estar models show that although the speed of adjustment for small shocks around equilibrium will be highly persistent larger shocks mean revert much faster than the glacial rates previously reported for linear models rogoff 1996 in this respect the estar models provide some solution to the ppp puzzle outlined in rogoff 1996 2the estar model can also provide an explanation of why ppp deviations analyzed from a linear perspective appear to be described by either a nonstationary integrated i 1 process or alternatively described by fractional processes see e g diebold husted and rush 1991 taylor peel and sarno 2001 and pippenger and goering 1993 show that the dickey fuller tests have low power against data simulated from an estar model michael nobay and peel 1997 and byers and peel 2003 show that data that is generated from an estar process can appear to exhibit the fractional property that this would be the case was an early conjecture by acosta and granger 1995 given that the estar model has a theoretical rationale whereas the fractional process is a relatively nonintuitive one the fractional property might reasonably be interpreted as a misleading linear property of ppp deviations granger and terasvirta 1999 whereas the empirical work employing estar models provides some explanation of the glacially slow adjustment speeds obtained in linear models there is one aspect of the empirical work that is worthy of further attention a second way of explaining the rogoff puzzle raised by rogoff himself 3 is to relax the assumption that the equilibrium real exchange rate is a constant see e g canzoneri cumby and diba 1996 and chinn and johnston 1996 theoretical models such as that of balassa 1964 and samuelson 1964 imply a nonconstant equilibrium in the real exchange rate if real productivity growth rates differ between countries 4 nonlinear models that incorporate proxies for these effects are found to parsimoniously fit post bretton woods data for the main real exchange rates see venetis paya and peel 2002 and paya venetis and peel 2003 naturally models that ignore this effect may generate misleading speeds of ppp adjustment to shocks in this regard the empirical results of hegwood and papell 2002 for the gold standard period are particularly interesting

ricardian equivalence and crowding out in asia rising budget deficits in both developed and developing countries have drawn considerable attention recently two aspects of these deficits have drawn particular attention first whether the effect of a given rate of government expenditure has a crowding out effect on private expenditure second whether this effect in any way depends on how the expenditures are financed that is whether by taxes or by government debt this latter issue is discussed under the rubric of what is called the ricardian equivalence proposition briefly it maintains that under certain assumptions the effect of a given rate of government expenditure on aggregate demand is independent of whether these expenditures are financed by taxes or by debt issue hence the proposition equivalence given the serious policy implications of this proposition there has been considerable empirical work on this issue but most of the work has been concentrated on the us and very little on the developing countries which is rather surprising

purchasing power parity and unit root tests using panel data abstract this paper reports the results of unit root tests for real exchange rates using a panel framework this panel approach provides greatly improved power compared to conventional univariate time series unit root tests we obtain evidence supporting ppp over the recent flexible exchange rate period for g 6 and oecd countries we show explicitly that failure to find such evidence in previous research was due to the low power of the tests

evidence on the extent and potential sources of long memory in u s treasury security returns and yields unlike equity returns many fixed income return measures appear to display long memory we show that the extent of long memory differs strongly for gross and excess holding period returns on u s treasury securities granger and others have argued that long memory may only reflect infrequent structural breaks we explore the impact of structural instability on tests for long memory and find only weak indications that it lies behind the long memory in our return series the evidence of long memory remains strong for yield and term premia series even after accounting for a series of potential underlying structural changes

long memory in foreign exchange rates using the geweke porter hudak test we find evidence of long memory in exchange rate data this implies that the empirical evidence of unit roots in exchange rates may not be robust to long memory alternatives fractionally integrated autoregressive moving average arfima models are estimated by both the time domain exact maximum likelihood ml method and the frequency domain approximate ml method impulse response functions and forecasts based on these estimated arfima models are evaluated to gain insight into the long memory characteristics of exchange rates some tentative explanations of the long memory found in the exchange rates are discussed

assessing ricardian equivalence this paper reviews the literature on ricardian equivalence this hypothesis may be interpreted as a generalisation to the short and the long run of the theories which put no weight on the real effects of public policies on aggregate demand we argue that ricardian equivalence relies on both permanent income hypothesis and the fulfilment of the intertemporal government budget constraint the theoretical literature emphasises several reasons for departures from this hypothesis however the empirical literature is inconclusive when ricardian equivalence is tested in a life cycle framework the hypothesis is usually rejected while when the empirical analysis is based on optimising models it is usually accepted

inflation in mozambique empirical facts based on persistence seasonality and breaks this article investigates inflation in mozambique using long range dependence lrd techniques in monthly data from december 1995 to october 2012 two important features of the data are analysed persistence and seasonality looking at aggregated and disaggregated data the stability of the parameters across the sample is also investigated the results indicate a high degree of persistence in the data along with a strong seasonal pattern policy implications are discussed

excess sensitivity of consumption to current income liquidity constraints or myopia this paper asks whether the empirical rejection of the rational expectations permanent income hypothesis occurs because agents are myopic in the sense that the marginal propensity to consume out of transitory income is non zero or because some agents face liquidity constraints the finding that the estimate of the mpc out of transitory income is dramatically affected in both magnitude and statistical significance by the inclusion of a proxy for liquidity constraints suggests that liquidity constraints are an important part of the explanation of the observed excess sensitivity of consumption to current income la sensibilite excessive de la consommation au revenu courant contraintes sur la liquidite ou myopie ce memoire examine la question a savoir pourquoi l hypothese du revenu permanent avec anticipations rationnelles n est pas v6rifiee empiriquement est ce parce que les agents economiques sont myopes i e que leur propension marginale a consommer a partir de leur revenu transitoire n est pas nulle ou bien est ce que certains agents economiques font face a des contraintes sur leur liquidite le fait que l estimation de la propension marginale a consommer le revenue transitoire est affectee par l inclusion d une variable qui tente de capturer l importance des contraintes sur la liquidit6 tant dans l 6valuation de sa taille que dans sa signification statistique suggere que ces contraintes jouent un role important dans l explication de cette sensibilite excessive qu on observe de la consommation aux changements dans le niveau de revenu courant almost all the recent empirical tests of the rational expectations permanent income hypothesis re pih have rejected the hypothesis using a rich variety of data sets and estimation methods the empirical work indicates that the failure of the re pih is significant both statistically and quantitatively the null hypothesis in this empirical literature typically consists of the joint hypothesis that 1 agents expectations are formed rationally 2 desired consumption is determined by permanent income and 3 capital markets are perfect in the sense that agents can lend or borrow against 1 studies rejecting the re pih include blinder 1981 flavin 1981 hall and mishkin 1982 hayashi 1982 and sargent 1978 in his original paper hall 1978 did not reject the re pih decisively however flavin 1981 showed that with a minor alteration in the specification of the alternative hypothesis the re pih could be rejected using hall s test and data set bernanke 1981 studying panel data on automobile expenditures did not find evidence against the hypothesis for an extensive survey of the empirical literature on the rational expectations permanent income hypothesis see king 1983 canadian journal of economics revue canadienne d economique xviii no 1 february fevrier 1985 printed in canada imprime au canada 0008 4085 85 117 36 1 50 canadian economics association this content downloaded from 157 55 39 17 on wed 31 aug 2016 05 08 58 utc all use subject to http about jstor org terms

the purchasing power parity persistence paradigm abstract rogoff journal of economic literature 1996 34 647 668 describes the remarkable consensus of 3 5 year half lives of purchasing power parity deviations among studies using long horizon data these studies however focus on rejections of unit roots in real exchange rates and do not use appropriate techniques to measure persistence our half life estimates explicitly account for serial correlation sampling uncertainty and most importantly small sample bias calculating confidence intervals as well as point estimates for long horizon and post 1973 data we find that even though most of the point estimates lie within the 3 5 year range univariate methods provide virtually no information regarding the size of the half lives

embodied pollution in trade estimating the environmental load displacement of industrialised countries abstract the present paper sets out to aid in the development of environmental load displacement indicators developing the notion of the environmental memory of physical flows we estimated embodied pollution in trade of 18 industrialized countries with a the rest of the world and b developing countries from 1976 to 1994 we found that in the last years of analysis total imports of japan usa and western europe have entailed in general larger air pollutant emissions than local exports the balance of embodied emissions in trade beet seems to follow an inverted u shape across time in japan and western europe and an n shape in the us in the period of analysis japanese and european environmental terms of trade with developing countries improved from the japanese and european point of view whereas american environmental terms of trade with developing countries deteriorated over time although there is no statistical trend between income and embodied emissions in imports in a cross section analysis there does seem to be a positive relationship between both variables at a national level the results suggest that despite many shortcomings this type of assessment may shed useful insights on the international aspects of sustainable development

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

is the ricardian equivalence proposition an aerie fairy theory for europe using a theoretical model based on dynamic optimizing agents we test empirically the ricardian equivalence proposition rep for the eu 15 countries the theoretical setting allows us to obtain estimates of the structural parameters of the model and to test directly the hypothesis implied by the rep using recently developed end of sample cointegration breakdown tests we find evidence of a change in the fiscal behaviour of individuals during the last decade after the introduction of a fiscal rule namely the maastricht criteria for most countries in the sample the results concerning the direction of change are mixed

measuring the persistence of deviations from purchasing power parity with a fractionally integrated star model abstract empirically elements of both fractional long memory and threshold non linearity are present in the real exchange rates of the g 7 countries against the us notably in the eu countries estimated half lives of deviations from ppp using median unbiased corrections to conventional linear autoregressive models corroborate existing evidence related to the ppp paradox as half lives range from at least four years to an infinite number of years in contrast for each eu country accounting for threshold non linearity results in estimated half lives that can be less than three years even with the allowance for fractional long memory

integration of environmental externalities in international commodity agreements abstract much ecological damage in third world countries is associated with commodity production for the world market competition in commodity markets prevents commodity exporting countries from making the costs of environmental preservation and reconstruction a recurrent element in pricing this article argues that an international commodity agreement ica can be the institutional locus where environmental externalities associated with commodity production can be integrated into a price system such extended or transformed icas are here labeled new international commodity agreements nicas they include a price markup for environmental preservation and reconstruction in commodity producing developing countries this price markup can be levied in the form of an export tax or in the form of a surcharge on import tariffs the conclusion of nicas maybe facilitated by the common fund for commodities which has recently come into operation

harvests and business cycles in nineteenth century america most major american industrial business cycles from around 1880 to the first world war were caused by fluctuations in the size of the cotton harvest due to economically exogenous factors such as weather wheat and corn harvests did not affect industrial production nor did the cotton harvest before the late 1870s the unique effect of the cotton harvest in this period can be explained as an essentially monetary phenomenon the result of interactions between harvests international gold flows and high powered money demand under america s goldstandard regime of 1879 1914

persistence in international inflation rates we test for fractional dynamics in inflation rates based on the consumer price index cpi for 27 countries and inflation rates based on the wholesale price index wpi for 22 countries the fractional differencing parameter is estimated using semiparametric and approximate maximum likelihood methods significant evidence of fractional dynamics with long memory features is found in both cpi and wpi based inflation rates for industrial as well as developing countries implications of the findings are considered and sources of long memory are hypothesized

new tests of the life cycle and tax discounting hypotheses abstract we first test a version of the permanent income consumption function recently suggested by barro the results support the theory except that consumption expenditures show sensitivity to transitory income next we use the consumption model to test the tax discounting hypothesis which is strongly supported this support for tax discounting disagrees with results from some earlier studies using more traditional specifications of the consumption function however we show that when certain obviously inadequate estimation procedures are corrected the traditional models also support tax discounting this uniform support for tax discounting suggests that the sensitivity of consumption to transitory income is not due to liquidity constraints

fractional integration and the volatility of uk interest rates we find that short rates are more nonstationary than longer rates and that differences in conditional volatility exist between different maturities therefore their dynamics may be both maturity specific and country specific and any a priori generalizing assumptions may be misleading

the process followed by ppp data on the properties of linearity tests recent research has reported the lack of correct size in stationarity test for ppp deviations within a linear framework however theoretically well motivated nonlinear models such as the estar appear to parsimoniously fit the ppp data and provide an explanation for the ppp puzzle employing monte carlo experiments we analyze the size and power of the nonlinear tests against a variety of nonstationary hypotheses we also fit the estar model to data from high inflation economies our results provide further support for estar specification

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

sources of fluctuations in relative prices evidence from high inflation countries casual analysis of six high inflation episodes indicates a strong positive relationship between movements in the relative price ratio measured by wpi cpi and the inflation rate the authors estimate a vector autoregression model in which relative price movements are driven by several fundamental disturbances fiscal monetary output and exchange rate identified using only long run restrictions based on a general equilibrium optimizing model analysis of the endogenous response of relative price changes to these disturbances suggests that output and monetary shocks are the most important driving forces although fiscal and exchange rate shocks are also influential in explaining relative price movements in some countries copyright 1993 by mit press

analysing inflation by the fractionally integrated arfima garch model this paper considers the application of long memory processes to describing inflation for ten countries we implement a new procedure to obtain approximate maximum likelihood estimates of an arfima garch process which is fractionally integrated i d with a superimposed stationary arma component in its conditional mean additionally this long memory process is allowed to have garch type conditional heteroscedasticity on analysing monthly post world war ii cpi inflation for ten different countries we find strong evidence of long memory with mean reverting behaviour for all countries except japan which appears stationary for three high inflation economies there is evidence that the mean and volatility of inflation interact in a way that is consistent with the friedman hypothesis

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

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

exchange rate mean reversion from real shocks within an intertemporal equilibrium model abstract the post bretton woods era has been characterized by real exchange rates that exhibit mean reversion with mixed evidence as to whether this reversion is partial ppp never holds or essentially complete this paper generates these stylized facts theoretically by synthesizing a simple intertemporal open economy model with the elasticities approach to the current account a central feature of the model is the existence of non traded goods the model can generate partial or approximately complete mean reversion for the real exchange rate depending on parameter values if innovations in output are made up of permanent and temporary components in addition temporary output shocks generate a type of hysteresis wherein the short run path for the exchange rate permanently alters its long run equilibrium value

the search for equilibrium relationships in international finance the case of the monetary model abstract this paper considers some of the main long run equilibrium relationships in international finance we supplement the phillips perron test which has a unit root under the null with the new kps test statistic which is based on a stationary null and apply them to the various exchange rate fundamentals the application of the johansen test for multiple cointegrating factors finds evidence of the existence of stable money demand functions in both the usa and uk with relatively short lived perturbations however there appears to be insufficient information in the data to distinguish whether the real exchange rate has a unit root or is persistent and mean reverting the consequent persistent deviations from purchasing power parity appears the only source of rejection of the equilibrium monetary model

fractional monetary dynamics we test for fractional dynamics in us monetary series their various formulations and components and velocity series using the spectral regression method we find evidence of a fractional exponent in the differencing process of the monetary series both simple sum and divisia indices in their components with the exception of demand deposits savings deposits overnight repurchase agreements and term repurchase agreements and the monetary base and money multipliers no evidence of fractional behaviour is found in the velocity series granger s journal of econometrics 25 1980 aggregation hypothesis is evaluated and implications of the presence of fractional monetary dynamics are drawn

government debt government spending and private sector behavior a current period tax reduction financed by issuing government debt shifts the timing of tax collection from the current period to the future if the future taxes implied by government debt are not fully perceived and discounted by the private sector there will be a net wealth effect that increases private sector consumption thus reducing capital accumulation and growth if on the other hand the implied future taxes are perceived and discounted by the private sector the current period tax reduction will be used to increase private saving to pay for the future taxes and government debt will be absorbed without any real effects on the economy the effects of government spending financed by current period taxation also depend upon private sector perceptions 2 if the benefits of government spending are ignored private sector consumption will decrease in accordance with the reduction in permanent disposable income to the extent that government spending is on consumption type goods that are perceived as substitutes for privately provided consumption goods there will be a relatively greater reduction in private sector consumption to the extent that government spending is on investment type goods yielding future goods and services that are perceived as substitutes for future privately provided consumption goods there will be a relatively smaller reduction in private sector consumption the standard approach to modeling private sector consumption saving behavior involves a rather asymmetric set of assumptions as to how the private sector perceives the various elements of government fiscal policy 3 current period taxes are assumed to be fully perceived but current period government spending is implicitly assumed to be completely ignored by the private sector in considering permanent personal disposable income the private sector is assumed to be forward looking in its assessment of income and taxation the stock of government debt is nevertheless included as part of the stock of private wealth the implicit assumption associate professor of economics graduate school of business university of chicago 1101 east 58th street chicago il 60637 i thank eugene fama levis kochin michael mussa paul evans and an anonymous referee for helpful comments i am particularly grateful to daniel benjamin for contributing many hours of discussion and laura lahaye who was a research assistant and valuable adviser on earlier drafts the theoretical debate on the burden of the debt has been long standing gerald o driscoll 1977 documents ricardo s nineteenth century position robert barro 1974 reopened the debate by introducing the fundamental issue of intergenerational transfers also discussed in merton miller and charles upton 1974 the empirical side of the debate was initiated by levis kochin s 1974 attempt to test for the effects of deficits on consumption and by martin feldstein s 1974 attempt to test for the effects of social security wealth on consumption other empirical contributions include jess yawitz and laurence meyer 1976 myself 1978 and j earnest tanner 1978 1979 with respect to the effects of government deficits and debt and barro 1978 michael darby 1979 and dean leimer and selig lesnoy 1982 with respect to social security wealth see also interesting recent papers by john seater 1982 who generates detailed tests of the effects of deficits and debt on consumption charles plosser 1982 who explores the effects of government spending and debt shocks on interest rates and feldstein 1982 who attempts tests similar to some in this paper see fn 29 2martin bailey s 1962 1971 development of the effects of government spending on private consumption and aggregate economic activity is the seminal contribution paul david and john scadding 1974 extend bailey s ideas and provide some supporting empirical evidence more recently willem buiter 1977 and myself 1978 developed models based on bailey s earlier work barro 1981 has an interesting paper on related issues see also david aschauer 1982 3the standard approach incorporates fiscal policy through the concept of personal disposable income and by including the stock of government debt as part of personal wealth see for example the empirical specification of albert ando and franco modigliani 1963 which has been the basis of most empirical consumption studies since and feldstein 1974 for one of the more influential papers based on the ando modigliani specification

how effective is fiscal policy in raising national saving while fiscal adjustment is commonly viewed as the cornerstone of macroeconomic stabilization the effectiveness of alternative fiscal instruments in raising national saving is still poorly understood this paper enters the debate by estimating a private consumption function that allows for two types of agents finite horizons and liquidity constraints and nests three different consumption hypotheses using a large panel data set that includes both industrial and developing countries we reject full ricardian equivalence we also find substantial differences between industrial and developing countries regarding both the extent of ricardian offsetting and the degree to which the government budget constraint is internalized

government spending and private consumption some international evidence this paper investigates the relationship between private consumption and publicly provided goods and services for a number of countries the empirical results show that in the aggregate private and government consumption are best described as complementary in the sense that an increase in one raises the marginal utility of the other the strength of this relationship is shown to be negatively affected by the government size these findings are robust across all specifications tried copyright 1994 by ohio state university press

unobserved component time series models with markov switching heteroscedasticity changes in regime and the link between inflation rates and inflation uncertainty in this article i first extend the standard unobserved component time series model to include hamilton s markov switching heteroscedasticity this will provide an alternative to the unobserved component model with autoregressive conditional heteroscedasticity as developed by harvey ruiz and sentana and by evans and wachtel i then apply a generalized version of the model to investigate the link between inflation and its uncertainty u s data gross national product deflator 1958 1 1990 4 i assume that inflation consists of a stochastic trend random walk component and a stationary autoregressive component following ball and cecchetti and a four state model of u s inflation rate is specified by incorporating regime shifts in both mean and variance structures i analyze the interaction of mean and variance over long and short horizons the empirical results show that inflation is costly because higher inflation is associated with higher long run uncertainty

real exchange rates under the gold standard purchasing power parity is one of the most important equilibrium conditions in international macroeconomics empirically it is also one of the most hotly contested numerous recent studies for example have sought to determine the validity of purchasing power parity using data from the post bretton woods float and have reached different conclusions we assert that most such studies are flawed for two reasons first the post 1973 data contain by definition only a very limited amount of the low frequency information relevant for examination of long run parity second the dynamic econometric techniques used to model deviations from parity are typically quite crude with respect to admissible low frequency dynamics both deficiencies are rectified in the present paper with dramatic results we construct a new data set of 16 real exchange rates covering more than a century of the classic gold standard period and we study deviations from parity using long memory models that allow for subtle forms of mean

ricardian equivalence empirical evidence from developing economies abstract the strong underlying assumptions of the barro ricardo equivalence proposition rep raise doubts on its validity especially for developing countries this paper attempts to analyze the validity of the rep and the sources of deviation from rep for a large sample of developing countries although the results are of a mixed nature they suggest that the presence of liquidity constrained individuals may be the source of deviation from the rep the analysis also indicates that public spending is a poor substitute for private consumption and hence implies that temporary increases in public spending may have some expansionary effect on aggregate demand

asian pacific real exchange rates real exchange rate behaviour is investigated for 11 asian pacific countries between 1976 and 1990 using a modified version of principal components analysis the standard principal component analysis is changed such that the results are independent of the numeraire currency for the full sample period the dominant asian exchange rate movements are relative to indonesia japan and the united states significant changes in the convariance structure have taken place since 1986 it appears that asian pacific real exchange rate movements since september 1986 are dominated by australia korea new zealand and japan this contradicts the popular notion of an emerging yen block in the asian pacific region

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