testing the long run implications of the neoclassical growth model abstract the long run implications of the one factor neoclassical growth model are tested by investigating the cointegrating relations between the log of output consumption and investment and the real interest rate with the exceptions of austria and the united kingdom the evidence for the united states and to a lesser extent for canada japan and the federal republic of germany is favorable to the neoclassical growth model a simple extension to a multicountry setting proved however to be unsuccessful national outputs nor consumption series are driven by just one common stochastic trend

the consumption real exchange rate anomaly with extensive margins abstract this paper investigates a consumption real exchange rate anomaly from the open macroeconomics literature known as the backus smith puzzle we both analytically and quantitatively examine how an expansion of trade along extensive margins can contribute to the puzzle s resolution our argument is based on 1 a wealth effect due to changes in the number of product varieties 2 statistical inefficiency in measuring the number of product varieties and 3 market incompleteness contrary to complete asset markets which in general feature overly strong risk sharing properties changes in the number of product varieties under incomplete markets may produce a wealth effect under high trade elasticity since statistical agencies systematically fail to capture the welfare impact arising from that changes data consistent terms of trade and real exchange rates tend to appreciate due to this positive wealth effect this provides a realistic correlation between data consistent real exchange rates and consumption

uninsurable risk and financial market puzzles abstract we compare the empirical performances of three risk sharing arrangements involving idiosyncratic skill shocks a where individuals are unable to directly insure their consumption against individual specific shocks b where agents strike long term insurance contract with financial intermediaries involving a truth revelation constraint as in kocherlakota and pistaferri 2009 c full risk sharing based on the widely accepted assumption of cross sectional log normality of individual consumption levels we work out closed form expressions of the pricing kernels for a and b we put these three models to test four financial market anomalies namely the equity premium currency premium risk free rate and consumption real exchange rate puzzles simultaneously in an integrated framework we find that the pricing kernel associated with a outperforms the other two models in terms of the produced estimates of the agent s preference parameters and the model ability to predict the equity and currency premia the risk free rate and the log growth in the exchange rate however the predictive ability is still far from satisfactory for all three models under scrutiny

investor overconfidence and the forward premium puzzle we offer an explanation for the forward premium puzzle in foreign exchange markets based upon investor overconfidence in the model overconfident individuals overreact to their information about future inflation which causes greater overshooting in the forward rate than in the spot rate thus when agents observe a signal of higher future inflation the consequent rise in the forward premium predicts a subsequent downward correction of the spot rate the model can explain the magnitude of the forward premium bias and several other stylized facts related to the joint behaviour of forward and spot exchange rates our approach is also consistent with the availability of profitable carry trade strategies

on savings and investment dynamics in a small open economy abstract this paper constructs a stochastic overlapping generations two country model of savings and investment under conditions of perfect international capital mobility the focus of the analysis is on the relationship between savings and investment dynamics in a small open economy in response to stochastic variations in domestic and or foreign production technologies the model is simulated under alternative specifications of the stochastic distribution governing both technologies this provides insight into the very complicated nature and rich diversity of possible relationships between savings and investment dynamics

fiscal policy banks and the financial crisis this paper studies the effectiveness of euro area ea fiscal policy during the recent financial crisis using an estimated new keynesian model with a bank a key dimension of policy in the crisis was massive government support for banks that dimension has so far received little attention in the macroeconomics literature we use the estimated model to analyze the effects of bank asset losses of government support for banks and other fiscal stimulus measures in the ea our results suggest that support for banks had a stabilizing effect on ea output consumption and investment increased government purchases helped to stabilize output but crowded out consumption higher transfers to households had a positive impact on private consumption but a negligible effect on output and investment banking shocks and increased government spending explain half of the rise in the public debt gdp ratio since the onset of the crisis

international spillovers of large scale asset purchases this paper evaluates the international spillover eects of large scale asset purchases lsaps using a two country dynamic stochastic general equilibrium model with nominal and real rigidities and portfolio balance eects portfolio balance eects arise from imperfect substitution between short and long term bond portfolios in each country as well as between domestic and foreign bonds within these portfolios we show that lsaps lower both domestic and foreign long term yields and stimulate economic activity in both countries international spillover eects

euro area and us external adjustment the role of commodity prices and emerging market shocks abstract the trade balances of the euro area ea and of the us have improved markedly after the global financial crisis this paper quantifies the drivers of ea and us economic fluctuations and external adjustment using an estimated 1999 2017 three region us ea rest of world dsge model with trade in manufactured goods and in commodities in the model commodity prices reflect global demand and supply conditions the paper highlights the key contribution of the post crisis collapse in commodity prices for the ea and us trade balance reversal aggregate demand shocks originating in emerging markets too had a significant impact on ea and us trade balances the broader lesson of this paper is that emerging markets and commodity shocks are major drivers of advanced countries trade balances and terms of trade

tests of variance bounds implied by cagan s hyperinflation model within the context of a demand for money model during a hyperinflation which cagan 1956 made famous this paper examines the implied variability of the underlying variables when expectations are formed rationally a la muth 1961 the measure of variability adopted in the paper is the variance and the focus is on the derivation and testing of the implied variability of both the expectations and the realizations of real and nominal money balances and inflation rates empirical evidence is provided for the case of the german hyperinflation of 1921 1923 specifically two sets of variance bound tests are analyzed the first set model 1 investigates the implied variance bounds on the rationally expected growth rates of the underlying variables and the second set model 2 explores the bounds on the observed outcomes of the levels of these variables for the purpose of empirical implementation since the expectation variables in model 1 are unobservable they have to be inferred from the available data by invoking additional specifications not required by model 2 two expectations generating mechanisms are employed in the paper one requires conditioning expectations on the past historical values of the underlying variables the second alternative specification involves the assumption of an efficient foreign exchange market to the extent that the expected cost of holding domestic money is the expected change in the exchange rate as has been observed by frenkel 1977 1979 to be the case the forward premium on foreign exchange can be used to infer inflationary expectations the present paper may be motivated along several lines since its inception cagan s demand for money model during a hyperinflation has played an important role in studies of hyperinflations but the empirical results are not uniform 2

evaluating an estimated new keynesian small open economy model abstract this paper estimates and tests a new keynesian small open economy model in the tradition of christiano et al 2005 nominal rigidities and the dynamic effects of a shock to monetary policy journal of political economy 113 1 1 45 and smets and wouters 2003 an estimated stochastic dynamic general equilibrium model of the euro area journal of the european economic association 1 5 1123 1175 using bayesian estimation techniques on swedish data to account for the switch to an inflation targeting regime in 1993 we allow for a discrete break in the central bank s instrument rule a key equation in the model the uncovered interest rate parity uip condition is well known to be rejected empirically therefore we explore the consequences of modifying the uip condition to allow for a negative correlation between the risk premium and the expected change in the nominal exchange rate the results show that the modification increases the persistence in the real exchange rate and that this model has an empirical advantage compared with the standard uip specification

on the structural interpretation of the smets wouters risk premium shock this article shows that the risk premium shock in smets and wouters 2007 can be interpreted as a structural shock to the demand for safe and liquid assets such as short term u s treasury securities several implications of this interpretation are discussed

growth and the international transmission of business cycles two country single good real business cycle models predict that the cross country correlation of output is smaller than the cross country correlations of consumption and productivity in contrast to the evidence in historical samples the objective of this paper is to reproduce the observed empirical evidence in a two country real business cycle model with endogenous growth central features of the model include a nonmarket sector and international externalities in production the model generates realistic cross country correlations for output consumption and productivity with standard parameter values copyright 1996 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

real wage rigidities and the new keynesian model most central banks perceive a trade off between stabilizing inflation and stabilizing the gap between output and desired output however the standard new keynesian framework implies no such trade off in that framework stabilizing inflation is equivalent to stabilizing the welfare relevant output gap in this paper we argue that this property of the new keynesian framework which we call the divine coincidence is due to a special feature of the model the absence of nontrivial real imperfections we focus on one such real imperfection namely real wage rigidities when the baseline new keynesian model is extended to allow for real wage rigidities the divine coincidence disappears and central banks indeed face a trade off between stabilizing inflation and stabilizing the welfare relevant output gap we show that not only does the extended model have more realistic normative implications but it also has appealing positive properties in particular it provides a natural interpretation for the dynamic inflation unemployment relation found in the data

can government purchases explain the recent u s net export deficits abstract this paper investigates the role of u s government purchases in explaining recent u s net export behavior i develop a two country neoclassical model that emphasizes linkages from government purchases to consumption i compare the model s implications for the movements and co movements of net exports against their data counterparts a parameterization in which government purchases and private consumption are complements and in which expectations of future government purchases are revised downward can account for much of the time path and co movements of net exports i conclude that u s government purchases play some role in explaining recent u s net export behavior

occbin a toolkit for solving dynamic models with occasionally binding constraints easily abstract the toolkit adapts a first order perturbation approach and applies it in a piecewise fashion to solve dynamic models with occasionally binding constraints our examples include a real business cycle model with a constraint on the level of investment and a new keynesian model subject to the zero lower bound on nominal interest rates compared with a high quality numerical solution the piecewise linear perturbation method can adequately capture key properties of the models we consider a key advantage of the piecewise linear perturbation method is its applicability to models with a large number of state variables

automatic stabilizers and economic crisis us vs europe this paper analyzes the effectiveness of the tax and transfer systems in the eu and the us to provide income insurance through automatic stabilization in the recent economic crisis we find that automatic stabilizers absorb 38 of a proportional income shock in the eu compared to 32 in the us in the case of an unemployment shock 47 of the shock is absorbed in the eu compared to 34 in the us this cushioning of disposable income leads to a demand stabilization of up to 30 in the eu and up to 20 in the us there is large heterogeneity within the eu automatic stabilizers in eastern and southern europe are much lower than in central and northern european countries we also investigate whether countries with weak automatic stabilizers have enacted larger fiscal stimulus programs

international risk sharing and capital mobility another look in a recent article brennan and solnik 1989 attempt to quantify numerically the welfare benefits of risk sharing by a group of oecd economies the result of their calculation is striking in their words p 371 the estimated welfare loss due to impairment of efficient risk sharing if capital flows were eliminated is of the order of 448 per cent of the level of consumption prevailing in the early 1970s this note argues that the brennan solnik welfare measure is faulty and leads to a substantial overstatement of the potential welfare benefits of international risk sharing within their sample of countries for standard levels of risk aversion the brennan solnik measure may overstate these benefits by as much as two orders of magnitude this is true even if one accepts as valid the empirical assumptions the authors make in calculating the consumption variability estimates that underlie their welfare conclusions

the classic european hyperinflations revisited testing the cagan model using a cointegrated var approach the cagan model of hyperinflation under rational expectations no bubbles and stationary velocity shocks has the implication that real balances cointegrate with money growth in a re examination of the classic european hyperinflations i find support for this cointegrating property which gives evidence against the assumption made in most previous studies that velocity shocks follow a random walk based on a cointegrated var model i reject statistically for four of the six hyperinflations the exact rational expectations cagan model but at the same time i find evidence of a substantial forward looking element in agents demand for real balances in the sense that a large part of the predictable movement in money growth is incorporated in agents demand for money

protection and the product line monopoly and product quality the product line decision of a monopolist is analyzed and used to study the effect of specific and ad valorem taxes on the entire product line while specific taxes or quotas raise average quality ad valorem taxes may not the welfare consequences of such policies when the monopolist is a home one and when he she is a foreign one are discussed with a home monopolist both specific and ad valorem subsidies are welfare improving while with a foreign monopolist their welfare properties depend on the distribution of consumers copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the cagan schedule in an overlapping generations setting cagan s portfolio balance schedule under rational expectations is generated by an overlapping generations model tenuousness of the equilibrium described by cagan s schedule can be interpreted as following from a requirement that the old generation be risk neutral

a real model of the world business cycle abstract in this paper a stochastic two country log linear infinite horizon model is used to analyze the generation and transmission of economic fluctuations across countries it is argued that following a country specific supply disturbance production interdependence and unitary elasticities in consumption and production are sufficient to generate comovements in aggregate economic activity investment and trade that are persistent over time and positively correlated across countries however the empirical analysis carried out for the usa japan germany and uk for the 1960 82 period suggests that common shocks rather than trade links are responsible for this pattern of comovements

an alternate method of estimating the cagan money demand function in hyperinflation under rational expectations abstract an alternate method of estimating the cagan money demand function under rational expectations is presented the technique utilizes the side assumptions that 1 accurate contemporaneous information on the price level and money stock is available to individuals and 2 unobservable noise in the portfolio balance schedule is neglible the procedure has three main virtues first it is implemented without imposing restrictions on the money supply process second the procedure is extremely simple and economical third it admits a simple test of a restriction implied by the cagan money demand function results are related to issues in recent hyperinflation studies

misspecification versus bubbles in hyperinflation data monte carlo and interwar european evidence abstract this paper analyzes some new tests of the cagan hyperinflation money demand model which have several advantages relative to those in the literature they do not confound specification error with rational bubbles can be implemented with a linear procedure and are frequently able to detect periodically collapsing bubbles which have challenged existing tests after a monte carlo analysis the tests are applied to data from hyperinflations in austria germany hungary and poland evidence of misspecification is found for austria germany and hungary while the model without a rational bubble component appears to fit the data for poland

cointegration and cagan s model of hyperinflation under rational expectations when money and prices are integrated of order two philip cagan s 1956 model of hyperinflation will give rise to two different levels of cointegration in most of the literature on the german hyperinflation one of these cointegrating relationships has been ruled out a priori by assuming that velocity shocks follow a random walk using data from the german hyperinflation the author finds this assumption to be unjustified based on a straightforward extension of the cointegrated var approach suggested by john y campbell and robert j shiller 1987 a method to evaluate the cagan model under rational expectations and no bubbles is proposed and implemented to the german data copyright 1993 by ohio state university press

the german hyperinflation and the demand for money revisited this paper shows that a remarkably well defined demand for real balances exists for the german hyperinflation episode including the final months which have previously been considered as outliers the authors econometric analysis exploits the theory of cointegration given the obvious nonstationarity of the data further they consider two likely sources of misspecification income variability and the necessity to distinguish between the high inflation and hyperinflation episodes copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

explaining saving investment correlations national saving and investment rates are highly positively correlated in virtually all countries this is puzzling as it apparently implies a low degree of international capital mobility this paper shows that the observed positive correlation between national saving and investment rates arises naturally within a quantitatively restricted equilibrium model with perfect mobility of financial and physical capital the model is consistent with the fact that saving investment correlations are larger for larger countries but are still substantial for small countries further the model is consistent with the finding that current account deficits tend to be associated with investment booms copyright 1993 by american economic association

factor hoarding and the propagation of business cycles shocks this paper analyzes the role of variable capital utilization rates in propagating shocks over the business cycle to this end we formulate and estimate an equilibrium business cycle model in which cyclical capital utilization rates are viewed as a form of factor hoarding we find that variable capital utilization rates substantially magnify and propagate the impact of shocks to agents environments the strength of these propagation effects is evident in the dynamic response functions of various economy wide aggregates to shocks in agents environments in the statistics that we construct to summarize the strength of the propagation mechanisms in the model and in the volatility of exogenous technology shocks needed to explain the observed variability in aggregate u s output other authors have argued that standard real business cycle rbc models fail to account for certain features of the data because they do not embody quantitatively important propagation mechanisms these features include the observed positive serial correlation in the growth rate of output the shape of the spectrum of the growth rate of real output and the correlation between the forecastable component of real output and various other economic aggregates allowing for variable capital utilization rates substantially improves the ability of the model to account for these features of the data

the demand for money and the variability of the rate of inflation an emperical note abstract in this note we incorporate the effect of inflation variability on the demand for money in pakistan it is found that this variable has a significant impact on money demand function our results are similar to those of klein while they differ with blejer

the international transmission of economic fluctuations abstract this paper suggests that for a wide class of international real business cycle models including models with imperfect competition the traditional channels of international transmission of business cycles through world interest rate and terms of trade variations cannot explain the cyclical response of the canadian economy to innovations in u s output empirically testable quantitative models of the effects on canadian economic activity of shocks to the u s economy are developed and their empirical relevance is tested by comparing impulse responses estimated from vector autoregressions to the quantitative predictions of the theoretical models

the dynamics of a small open economy in response to monetary fiscal and productivity shocks abstract this paper evaluates empirically the relative importance of monetary and fiscal versus technology shocks in an open economy characterized by perfect international capital mobility the variance covariance matrix of these shocks is estimated a stochastic model is used to perform numerical simulations the results show that persistent shocks to productivity can reproduce several empirical regularities including the puzzling high correlation between national saving and investment remarkably well and that monetary and fiscal shocks play a minor role

consumption and real exchange rates in dynamic economies with non traded goods abstract we examine the possibility that non traded goods may account for several striking features of international macroeconomic data large persistent deviations from purchasing power parity small correlations of aggregate consumption fluctuations across countries and substantial international real interest rate differentials a dynamic exchange economy is used to show that non traded goods in principle can account for each of these phenomena in the theory there is a close relation between fluctuations in consumption ratios and those in bilateral real exchange rates but we find little evidence for this relation in time series data for eight oecd countries

financial spillover and global risk in a multi region model of the world economy abstract this paper estimates a three region dsge model ea us row with international financial linkages in the form of cross border equity holding and allowing for region specific as well as global financial shocks which match empirical measures of financial tightness and global stock market valuation spillover from financial shocks increases with international financial integration and is practically zero under full home bias in normal times the global risk captures international synchronisation of financial cycles spillover of financial shocks is amplified at the zero lower bound at which investment risk takes on the characteristics of a general uncertainty shock the model results suggest that integrated financial markets should provide a powerful motivation for international policy coordination to prevent financial turmoil

full insurance in the presence of aggregate uncertainty this paper tests implications of full consumption insurance the object is to determine how much mileage can be obtained from a model with complete markets with such features as private information or liquidity constraints omitted the implication exploited is that individual consumption responds to aggregate risk but not to idiosyncratic risk the test involves regressing the change in household consumption onto the change in aggregate consumption and other right hand side variables such as the change in household income and change in employment status all variables other than the change in aggregate consumption are predicted to be insignificant in explaining the change in household consumption with observations on consumption and income for 10 695 households from the consumer expenditure survey the results are mixed the results for one specification exponential utility are mostly consistent with full consumption insurance the results for the other specification power utility are not

the macroeconomic effects of quantitative easing in the euro area evidence from an estimated dsge model this paper analyses the macroeconomic effects of the ecb s quantitative easing programme using an open economy dsge model estimated with bayesian techniques using data on government debt stocks and yields across maturities we identify the parameter governing portfolio adjustment in the private sector shock decompositions suggest a positive contribution of ecb qe to ea year on year output growth and inflation of up to 0 4 and 0 5 pp in the standard linearised version of the model allowing for an occasionally binding zero bound constraint by using piecewise linear solution techniques raises the positive impact up to 1 0 and 0 7 pp respectively

consumption real exchange rates and the structure of international asset markets abstract international real business cycle irbc models that assume complete asset markets yield strong restrictions for consumption and bilateral real exchange rate series empirical tests with data for the us japan france uk italy canada and sweden suggest that neither the trend behavior nor high frequency movements of consumption and real exchange rates are well explained by irbc models with complete markets it appears however that high frequency fluctuations of consumption and real exchange rates are consistent with unrestricted international trade in risk free bonds

additional evidence on inflation variability the experience of asian countries abstract the relationship between inflation and its variability has been examined by using time series data for eight asian countries it is found that this relationship also holds for countries which have enjoyed a period of long price stability furthermore this relationship also holds for highly industrialized countries

a simple test of consumption insurance are consumers effectively insured against idiosyncratic shocks to income or wealth either by formal institutions such as charities private insurance and government programs or by informal mechanisms such as gifts and loans from relatives friends and neighbors under full insurance consumption growth should be cross sectionally independent of idiosyncratic variables that are exogenous to consumers this proposition is tested by cross sectional regressions of consumption growth on a variety of exogenous variables full insurance is rejected for long illness and involuntary job loss but not for spells of unemployment loss of work due to strike and an involuntary move

comparing shocks and frictions in us and euro area business cycles a bayesian dsge approach this paper estimates a dsge model with many types of shocks and frictions for both the us and the euro area economy over a common sample period 1974 2002 the structural estimation methodology allows us to investigate whether differences in business cycle behaviour are due to differences in the type of shocks that affect the two economies differences in the propagation mechanism of those shocks or differences in the way the central bank responds to those economic developments our main conclusion is that each of these characteristics is remarkably similar across both currency areas copyright 2005 john wiley sons ltd

pricing to market price discrimination or product differentiation we employ a vertical differentiation model to examine the potential bias in pricing to market results when using export unit values aggregating differentiated products our results show that i false evidence of pricing to market is always found when using unit values whether the law of one price holds or not and ii the size of the bias increases with the level of product differentiation our simulation results support those conceptual findings thus some of the positive pricing to market results in the literature could be an artifact of the product heterogeneity embodied in unit values rather than evidence of imperfect competition

on protection and the product line a reply this reply shows that both market structure and the form of preferences affect the argument by r falvey 1979 on ad valorem tariffs and the quality of imports it does not depend on whether or not consumers are restricted to purchasing only one variety copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

cross country causes and consequences of the crisis an update abstract we update rose and spiegel forthcoming rose and spiegel 2010 and search for simple quantitative models of macroeconomic and financial indicators of the great recession of 2008 09 we use a cross country approach and examine a number of potential causes that have been found to be successful indicators of crisis intensity by other scholars we check a number of different indicators of crisis intensity and a variety of different country samples while countries with higher income and looser credit market regulation seemed to suffer worse crises we find few clear reliable indicators in the pre crisis data of the incidence of the great recession countries with current account surpluses seemed better insulated from slowdowns

misspecification versus bubbles in hyperinflation data comment abstract in this article i critically review some of the claims and analyses made by hooker j int money financ 19 2000 583 in his study of the cagan hyperinflation model i argue that i contrary to what hooker claims cointegration tests can be used to discriminate between bubbles and no bubbles ii contrary to hooker s claim his empirical results for the interwar european hyperinflations do not in general imply that the cagan model is misspecified iii although hooker s analyses build directly on the durlauf and hall bounds on the variances of specification errors in models with expectations nber working paper 2936 massachusetts cambridge 1989 methodology he neglects an important part of that methodology namely the measurement of the magnitude of noise i present such measures and together with reported cointegration tests the noise measures help reinterpreting hooker s empirical results

international risk sharing and capital mobility abstract under certain assumptions pareto efficient risk sharing implies that changes in consumption across nations will be perfectly correlated this result leads to an indicator of the welfare loss due to imperfect sharing of consumption risks across nations this indicator is used to evaluate the welfare implications of restrictions on various components of the international capital flow holding constant other components of the flow and domestic investment we find that variability in national consumption growth rates would have been considerably greater if capital flows had been restricted and that welfare would have been reduced significantly

realistic cross country consumption correlations in a two country equilibrium business cycle model abstract a well known feature of one good multi agent arrow debreu economies with edentical additively separable homothetic preferences is that the consumptions of all agents are perfectly correlated such economies are widely used in interpreting business cycles but seem to be inconsistent with observed cross country correlations of aggregate consumption this paper provides an example of a two country real business cycle model in which preferences are not separable between consumption and labor supply the model has a simple closed form solution closed form solution and allows for fluctuations in labor supply in equilibrium moreover it generates correlations between national consumption rates which are close to some of those observed in historical data jel f41

bubble weak and strong hyperinflation theory and empirical evidence the monthly continuous inflation rate that maximizes the inflation tax revenue varies widely from 18 3 to 143 according to semi elasticity estimates for the german hyperinflation made by several authors cagan 1956 barro 1970 frenkel 1977 sargent 1977 goodfriend 1982 burmeister and wall 1987 christiano 1987 casella 1989 taylor 1991 engsted 1993 imrohoroglu 1993 michael et al 1994 those estimates lead one to conclude that during hyperinflation the german government could have obtained more tax revenue with lower inflation rates

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

misspecification and bubbles in hyperinflation data reply to engsted engsted 2003 takes issue with several aspects of hooker 2000 mainly he objects to the statement that cointegration tests cannot be implemented when bubbles exist draws different conclusions than i did from my bubble test evidence and faults the paper s failure to include measures of the magnitude of model noise in this reply i focus mostly on interpreting the evidence where we have substantive disagreement that i believe is largely a result of differing priors regarding cointegration tests in the presence of bubbles in practice researchers may of course infer that a differenced bubble is stationary even though it will not be and apply cointegration tests my statement was simply intended to draw attention to this issue and highlight concerns about test properties what is particularly helpful in assessing the usefulness of a test under such conditions is a monte carlo analysis like the one included in my paper which gives readers a way to judge for themselves the efficacy of the test under different scenarios on the last point i agree with engsted on the merits of model noise measures and i find those he reports a useful contri