the relationship between exchange rates and interest rate differentials a wavelet approach this paper uses wavelet analysis to investigate the relationship between the spot exchange rate and interest rate differential for seven pairs of countries with a small country sweden included

an overview of experimental u s consumer price indexes the consumer price index cpi has come under intense scrutiny in recent years to help assess potential differences between what the cpi measures and how it is used for various purposes the bureau of labor statistics has created a series of experimental price indexes this article contrasts how the cpi is currently constructed with those experimental indexes specifically experimental cpps have been constructed for two population groups older americans and poor americans in addition experimental geometric mean and superlative indexes have been developed that move the cpi away from its traditional fixed market basket concept

revisiting the exchange rate disconnect puzzle abstractone of the major anomalies in international macroeconomics is the persistent finding that the exchange rate has no empirical relationship with a variety of macroeconomic fundamentals dubbed the exchange rate disconnect puzzle this article examines this issue for five australian dollar bilateral exchange rates using quarterly data for the period 1984 1 2015 4 a novel feature of this article is that it departs from the extant literature by using a different approach to testing for cointegration the results show that the exchange rates and fundamentals move together in the long run furthermore the results show that fundamentals granger cause exchange rates both in the short run and the long run

inflation bias after the euro evidence from the uk and italy this article presents an indirect approach to investigate the possible existence of measurement error bias in the harmonized index of consumer prices for the uk and italy our empirical results show that there is no significant evidence of a bias for the uk or for italy prior to the introduction of the euro since january 2002 however the inflation rate in italy has been underestimated by at least 6 percentage points

third country effects on the exchange rate abstract predictive regressions for bilateral exchange rates are typically run on variables from the associated bilateral pairs of countries these regressions characteristically have low explanatory power which leaves room for an omitted variables interpretation we test whether these omitted variables are from third countries when third country macro factors are added to bilateral exchange rate regressions they enter significantly and increase the adjusted r 2 a three country exchange rate model illustrates potential channels for third country spillovers to affect the bilateral rate

evaluating the predictability of exchange rates using long horizon regressions mind your p s and q s since the breakdown of the bretton woods agreement researchers have used a wide variety of structural models to try to predict exchange rate movements unfortunately finding consistent evidence that these models outperform a random walk has proven elusive in this paper we investigate the impact different methods of inference may have had on these conclusions using p values based on recently developed tests of forecast accuracy and encompassing as well as q values designed to mitigate multiple testing problems we provide stronger evidence consistent with these models having superior predictive ability our results suggest that previous studies inability to detect predictive ability may have been influenced by the statistics used and the manner in which they were employed

tests for parameter instability in regressions with i 1 processes this article derives the large sample distributions of lagrange multiplier lm tests for parameter instability against several alternatives of interest in the context of cointegrated regression models the fully modified estimator of phillips and hansen is extended to cover general models with stochastic and deterministic trends the test statistics considered include the supf test of quandt as well as the lm tests of nyblom and of nabeya and tanaka it is found that the asymptotic distributions depend on the nature of the regressor processes that is if the regressors are stochastic or deterministic trends the distributions are noticeably different from the distributions when the data are weakly dependent it is also found that the lack of cointegration is a special case of the alternative hypothesis considered an unstable intercept so the tests proposed here may also be viewed as a test of the null of cointegration against the alternative of no cointegration the tests are applied to three data se

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

stock market expectations of dutch households despite its importance for the analysis of life cycle behavior and in particular retirement planning stock ownership by private households is poorly understood among other approaches to investigate this puzzle recent research has started to elicit private households expectations of stock market returns this paper reports findings from a study that collected data over a two year period both on households stock market expectations subjective probabilities of gains or losses and on whether they own stocks we document substantial heterogeneity in financial market expectations expectations are correlated with stock ownership over the two years of our data stock market prices increased and expectations of future stock market price changes also increased lending support to the view that expectations are influenced by recent stock gains or losses

potential pitfalls for the purchasing power parity puzzle sampling and specification biases in mean reversion tests of the law of one price the ppp puzzle is based on empirical evidence that international price differences for individual goods loop or baskets of goods ppp appear highly persistent or even nonstationary the present consensus is these price differences have a half life that is of the order of five years at best and infinity at worst this seems unreasonable in a world where transportation and transaction costs appear so low as to encourage arbitrage and the convergence of price gaps over much shorter horizons typically days or weeks however current empirics rely on a particular choice of methodology involving i relatively low frequency monthly quarterly or annual data and ii a linear model specification in fact these methodological choices are not innocent and they can be shown to bias analysis towards findings of slow convergence and a random walk intuitively if we suspect that the actual adjustment horizon is of the order of days then monthly and annual data cannot be expected to reveal it if we suspect arbitrage costs are high enough to produce a substantial band of inaction then a linear model will fail to support convergence if the process spends considerable time random walking in that band thus when testing for ppp or loop model specification and data sampling should not proceed without consideration of the actual institutional context and logistical framework of markets

monetary fundamentals and exchange rate dynamics under different nominal regimes we investigate the dynamic relationship between the us dollar exchange rate and its fundamentals across different exchange rate regimes using data going back to the late 1800s or early 1900s for six industrialized countries for these countries there is evidence of a long run relation between the nominal exchange rate and monetary fundamentals consistent with conventional theories of exchange rate determination we employ a markov switching vector equilibrium correction model that allows for regime shifts in the entire set of parameters and the variance covariance matrix our results suggest that the relative importance of exchange rates and fundamentals in restoring the long run equilibrium level implied by the exchange rate monetary fundamentals model varies significantly over time and is affected by the nominal exchange rate regime in operation

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

testing the monetary model of exchange rate determination new evidence from a century of data abstract we test the long run monetary model of exchange rate determination for a collection of 14 industrialized countries using data spanning the late nineteenth or early twentieth century to the late twentieth century interestingly we find support for a simple form of the long run monetary model in over half of the countries we consider for these countries we estimate vector error correction models to investigate the adjustment process to the long run monetary equilibrium in the spirit of meese and rogoff journal of international economics 14 1983 3 24 we also compare nominal exchange rate forecasts based on monetary fundamentals to those based on a naive random walk model

real exchange rates in the short medium and long run abstract this paper uses long horizon autocorrelations and variance ratio statistics to test for long term mean reversion in real exchange rates unlike most previous tests of this hypothesis the tests do reject a random walk for monthly data in the post bretton woods era however the statistics indicate that positively correlated innovations rather than mean reversion are the source of the rejection tests using annual data for the twentieth century also reject the random walk in this case however the rejection can be attributed to mean reversion and confirms that ppp is a long term phenomenon

measuring pro poor growth when relative prices shift abstract the theoretical literature on pro poor growth as well as its application has not paid sufficient attention to the issue of varying inflation rates across the income distribution ignoring inflation inequality in pro poor growth measurements can however severely bias assessments of pro poor growth hence we suggest simple methods which are able to redress such biases as an empirical illustration we use the case of burkina faso and the growth incidence curve and poverty change decompositions as pro poor growth measurements

money stock versus monetary base in time frequency exchange rate determination abstract this study uses a time frequency analysis to provide empirical evidence of the changing role of the money supply in the determination of the japanese yen u s dollar exchange rate we demonstrate that in the short run money supply has a stable significant effect on the exchange rate only after the introduction of quantitative easing policies together with a remarkable difference between the money stock and the monetary base under quantitative easing policies while money stock has a limited role at best in short run exchange rate dynamics increases in the monetary base cause the currency to depreciate in the short run the notable role of the monetary base remains exceptionally stable over time only in quantitative easing regimes while the exchange rate is unstably connected to other fundamentals moreover in the long run the monetary base outperforms the money stock in explaining the exchange rate in general lastly the growing role of the monetary base is shown to be robust to several checks

on the predictive power of monetary exchange rate model the case of the malaysian ringgit us dollar rate the predictive power of the monetary model for the malaysian ringgit us dollar rm usd rate is analysed using quarterly data ending in 2006 q3 we find compelling evidence of a long run relationship between exchange rates and the economic fundamental determinant macroeconomic factors systematically affect the long run movement of the rm usd rate additionally the rm usd rate was overvalued by about 10 several quarters before the 1997 crisis after the crisis rates fluctuated close to the equilibrium value the out of sample forecasts demonstrate that the monetary model outperforms the naive random walk model the monetary and purchasing power parity ppp models do well at the four to eight quarters horizon

are real exchange rates nonstationary evidence from a panel data test it is well documented that real exchange rates between the united states and many industrialized countries in the post bretton woods period are integrated this result implies that purchasing power parity ppp does not hold even as a long run relationship this paper demonstrates that the failure to reject the unit root hypothesis may result from the low power of existing univariate test procedures i test for unit roots in real exchange rates by employing a more powerful panel based procedure using both cpi and wpi real dollar exchange rate data i strongly reject the null hypothesis of a unit root my results provide overwhelming support for the long run ppp under the current float copyright 1996 by ohio state university press

group cost of living indexes when households have different consumption patterns whose cost of living should an actual price index represent this issue was first raised by j l nicholson and s j prais in the 1950 s both made essentially the same point official price indexes give each household s consumption pattern an implicit weight proportional to its total expenditures see nicholson p 540 prais calls such an index plutocratic and both nicholson and prais suggest an alternative democratic price index which gives all households equal weight a group cost of living index is an index that measures the impact of price changes on the welfare of a group or population of households to define such an index requires an explicit or implicit concept of the welfare of a group and hence requires interpersonal comparison and distributional judgments since group indexes such as the consumer price index play an important role in our perception of inflation and the formation of macro economic policy and are used to escalate wages and social security benefits they have significant effects on government decisions and economic welfare despite their intellectual interest and practical importance however until recently they have been virtually ignored by index number theorists the theory of the cost of living index cli provides a generally accepted framework for measuring the impact of price changes on the welfare of a particular household this paper extends the cli concept to groups and discusses which questions require group indexes and which do not i begin by introducing some notation and terminology in the context of household clis a household s cli is the ratio of the expenditures required to attain a particular base indifference curve in two price situations suppose there are n goods and s households and denote the preference ordering of the rth household by r r the base indifference curve can be identified by a goods collection xro which lies on it the expenditure function er p xr rr shows the minimum expenditure required to attain the base indifference curve at prices p the cli of the rth household ir pa pb xrorr is the ratio of the minimum expenditure required to attain the base indifference curve at prices pa comparison prices to that required at prices pb reference prices except in very special cases the value of the cli depends on the base indifference curve at which it is evaluated as successively higher base indifference curves are specified one would expect the prices of luxuries to become more important relative to the prices of necessities hence it is convenient to regard the cli as a function of the base indifference curve rather than as a single number corresponding to a particular base thus instead of offering guidance in choosing an appropriate base indifference curve theory suggests that there is no need to choose to construct the exact cli an investigator needs to know the household s preferences lacking this knowledge he rnust fall back on indexes which require less information and which are upper bounds on the exact index the laspeyres index jr papbxrb is the ratio of the cost of purchasing the reference period consumption basket at comparison prices to its cost

cellular telephone new products and the cpi since their introduction in 1983 cellular telephones adoption has grown at 25 35 per year at year end 1997 about 55 million cellular telephones were in use in the united states the bureau of labor statistics bls did not know that cellular telephones existed at least in terms of calculating the consumer price index cpi until 1998 when they were finally included in the cpi omitting cellular telephones from the cpi created a significant bias i estimate a bias in the bls estimate of the telecommunications services index of between 8 1 9 per year because of the omission of the cellular telephone rather than telecommunications service prices increasing at about 1 1 per year the correct calculation has them decreasing at about 8 per year omission of new goods from the cpi for significant periods of time leads to important bias in the calculation of the cpi

testing the monetary model of exchange rate determination a closer look at panels abstract in this paper we undertake an extensive evaluation of panel tests of the long run monetary model of exchange rate determination we first show how poorly the monetary model performs on a country by country basis for us dollar exchange rates over the post bretton woods period for a large number of industrialized countries in sharp contrast we find considerable support for the monetary model using panel procedures as in groen 2000 and mark and sul 2001 given the disparity in the country by country and panel approaches we carefully analyze the homogeneity restrictions inherent in the panel procedures the evidence on the appropriateness of the homogeneity restrictions is mixed in the end whether the monetary model conforms to post bretton woods data largely depends on one s prior beliefs

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

testing for bubbles in exchange markets a case of sparkling rates this paper investigates the possibility that the observed deviations of major bilateral exchange rates from values implied by market fundamentals are a consequence of rational asset market bubbles when a new econometric methodology for detecting asset market bubbles is used the joint hypothesis of no bubbles and stable autoregressive processes for relative money supplies and real incomes is rejected for the dollar deutsche mark and dollar pound ratesusing monthly data over the period 1973 82 additional tests for coefficient stability and for lack of cointegration between exchange rates and market fundamentals suggest that the bubble findings must be interpreted with care

testing the validity of the monetary model for asean with structural break this study examines the validity of the long run structural relations underlying the monetary exchange rate model for malaysia singapore the philippines and thailand take into consideration the possibility of structural change we examined the models using recent developed techniques of testing unit root and cointegration with a structural break our findings of three cointegrating relations among the variables in the system were further identified by testing theoretical restrictions on the cointegrating equations the long run relationships were able to be interpreted according to the theory hence support the long run validity of the monetary exchange rate model

oil price fluctuations and u s dollar exchange rates adding oil prices to the monetary model of exchange rates we find that oil prices significantly explain movements in the value of the u s dollar usd against major currencies from the 1970s to 2008 our long run and forecasting results are remarkably consistent with an oil exchange rate relationship increases in real oil prices lead to a significant depreciation of the usd against net oil exporter currencies such as canada mexico and russia on the other hand the currencies of oil importers such as japan depreciate relative to the usd when the real oil price goes up

price level co movements within currency unions an alternative integration metric this paper analyses currency union integration by testing whether price levels in member countries possess a common stochastic trend the trace statistic test for cointegration proposed by johansen 1995 demonstrates the presence of such a trend for most unions a disaggregated analysis identifies a common stochastic trend for several though fewer than half of country pairs within a union some unions such as the eurozone have small shares of cointegrated country pairs yet the share of cointegrated country pairs is large relative to countries outside currency unions comparison to a control group country pairs where one country belongs to a given union and the other country does not indicates that the cointegration found within a currency union is a union specific trait and not a feature of the individual countries within the union these results provide an alternative metric to intraunion trade for gauging the extent of currency union integration

changing monetary policy rules learning and real exchange rate dynamics when the exchange rate is priced by uncovered interest parity and central banks set nominal interest rates according to a reaction function such as the taylor rule the real exchange rate will be determined by expected inflation and the output gap or the unemployment gap of the home and foreign countries this paper examines the implications of these taylor rule fundamentals for real exchange rate determination because the true parameters in central bank policy rules are unknown to the public and change over time the model is presented in the context of a least squares learning environment this simple learning model captures the volatility and the major swings in the real deutschemark euro dollar exchange rate from 1976 to 2007

distributional aspects of the quality change bias in the cpi evidence from spain abstract this paper shows that the richer households are significantly more affected by the quality change bias qcb in the cpi the empirical analysis combines the detailed information pertaining to the size of the qcb for the us with household specific cpis for spain

the monetary exchange rate model as a long run phenomenon abstract pure time series based tests fail to find empirical support for monetary exchange rate models in this paper we apply pooled time series estimation on a forward looking monetary model resulting in parameter estimates which are in compliance with the underlying theory based on a panel version of the engle and granger engle r f granger c w j 1987 co integration and error correction representation estimation and testing econometrica 55 251 276 two step procedure we find that the residuals of the panel based estimated monetary model are stationary this indicates that on a pooled time series level there is cointegration between the exchange rate and the macroeconomic fundamentals of this monetary model

the real real price of nonrenewable resources copper 1870 2000 over the past 40 years economists have devoted considerable effort to estimating long run trends in real commodity prices the results indicate that the real prices for many commodities have fallen suggesting to the surprise of many that resource scarcity is declining over time almost all of this work however uses the u s producer price index or other standard price deflators which recent research shows overestimate inflation for several reasons this article examines copper prices with adjusted deflators designed to eliminate this bias it finds that the trend over time which is significantly downward when no adjustment is made to the deflator displays no tendency in either direction or is significantly upward depending on the magnitude of the deflator adjustment employed these findings suggest that real resources prices provide less support than widely assumed for the hypothesis that resources are becoming more available or less scarce over time

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

exchange rate predictability the main goal of this article is to provide an answer to the question does anything forecast exchange rates and if so which variables it is well known that exchange rate fluctuations are very difficult to predict using economic models and that a random walk forecasts exchange rates better than any economic model the meese and rogoff puzzle however the recent literature has identified a series of fundamentals methodologies that claim to have resolved the puzzle this article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up to date thorough empirical analysis overall our analysis of the literature and the data suggests that the answer to the question are exchange rates predictable is it depends on the choice of predictor forecast horizon sample period model and forecast evaluation method predictability is most apparent when one or more of the following hold the predictors are taylor rule or net foreign assets the model is linear and a small number of parameters are estimated the toughest benchmark is the random walk without drift

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

consumer prices the consumer price index and the cost of living after presenting major findings and recommendations the cpi commission reiterates the estimate of a 1 1 percentage point per annum upward bias it rejects the contention that the bls already makes substantial corrections for quality change that quality improvements and new products accrue only to the rich and that procedures to make more extensive quality adjustments valuations of new products and adjustments for commodity and outlet substitution are impractical the bias in the cpi can be sharply reduced as the authors detail in this paper coauthors are ellen r dulberger robert j gordon zvi griliches and dale w jorgenson

on estimating the cost of characteristics indices from consumer demand analysis we examine the information content of relative equivalence scales using a multiperiod framework and argue that in the absence of independence of base ib these scales can be uniquely identified from demand analysis only when the transformations of preferences through time are the same for all household types a property termed as intertemporally invariant base iib utility restrictions imposed by iib on conditional demands are tested empirically and found rejected within the context of a rank 3 demand system applied to individual household data drawn from the u k family expenditure survey 1970 86 welfare implications of false iib assumptions are also empirically investigated jel classification d1 a propos de l estimation du cout des indices caracteristiques a partir de l analyse de la demande des consommateur ce memoire examine le contenu informationnel des echelles d equivalence relative en utilisant un cadre d analyse sur plusieurs periodes et suggere que en l absence d une independance de la base ib ces echelles peuvent etre identifiees d une maniere univoque seulement si les transformations de preferences dans le temps sont les memes pour tous les types de menages on nomme cette propriete utilite de base invariante dans le temps iib les restrictions verifiables imposees par iib sur les demandes conditionnelles sont verifiees empiriquement et sont rejetees dans le contexte d un systeme de demande de rang 3 applique aux donnees des menages individuels dans une etude des depenses des menages de la grande bretagne 1970 86 les implications de faux postulats iib sont analysees empiriquement

prices engel curves and time space deflation impacts on poverty and inequality in vietnam many developing countries lack spatially disaggregated price data some analysts use no price methods by using a food engel curve to derive the deflator as that needed for nominally similar households to have equal food shares in all regions and time periods this method cannot be tested in countries where it is used as a spatial deflator since they lack suitable price data in this paper data from vietnam are used to test this method against benchmarks provided by multilateral price indexes calculated from repeated spatial price surveys deflators from a food engel curve appear to be a poor proxy for deflators obtained from multilateral price indexes to the extent that such price indexes reliably compare real living standards over time and space these results suggest that estimates of the level location and change in poverty and inequality would be distorted if the engel method deflator was used in their stead

exchange rate economics is always and everywhere controversial abstractthis article reviews the major developments in the recent literature on exchange rate economics it is argued that the link between the exchange rate and economic fundamentals is breaking new ground evidence indicates that alternative analytical frameworks such as the new open economy macroeconomics and exchange rate arrangements such as the euro have their theoretical and analytical elegance but are proving empirically very difficult to implement the role of methodological advances and alternative fundamental instruments such as world commodity prices is also highlighted

the monetary model strikes back evidence from the world abstract we revisit the dramatic failure of monetary models in explaining exchange rate movements using the information content from 98 countries we find strong evidence for cointegration between nominal exchange rates and monetary fundamentals we also find fundamentals based models very successful in beating a random walk in out of sample prediction

does the euro follow the german mark evidence from the monetary model of the exchange rate abstract this paper investigates whether german or synthetic european pre emu data provides the appropriate empirical basis for evaluating euro dollar exchange rate behavior monetary exchange rate equations are estimated for both data sets over the pre emu period and out of sample forecasts are evaluated to assess their ability to explain the euro dollar exchange rate from 1999 to 2004 while forecast accuracy tests confirm the usefulness of synthetic european data for euro exchange rate analysis forecasts based on the german pre emu experience cannot even beat a random walk our results indicate that the euro does not simply follow the german mark but that it has its origins in the other pre emu currencies as well

co integration tests for long run equilibrium in the monetary exchange rate model abstract the monetary model of exchange rate determination is tested as a long run equilibrium relation tests of co integration among the variables in this model over a wide range of specifications are generally unfavorable to the monetary approach

should the cost of living index provide the conceptual framework for a consumer price index in some countries the cost of living col index serves as the conceptual framework for the cpi but it has been rejected in others this paper reviews issues that have arisen in the statistical agency debate and in the economics literature on the col index including rhetorical matters which have influenced the debate i contend that col theoiy is useful as a decision making framework in estimating components of the cpi and that col index theory provides appropriate guidance for measuring consumer inflation contrary to the view that has been adopted for the european hicp and expressed by an advisory committee for the rpi in several countries the united states netherlands sweden the theory of the cost of living col index provides the conceptual framework for the country s consumer price index cpi see united states department of labor 1997 balk 1994 and dalen 1999 others reject the cost of living index framework an example is the australian bureau of statistics 1997 rejection of the col index is also explicit in an rpi advisory committee recommendation in the united kingdom in still other countries canada being an example official documents for the cpi are ambiguous about the role of the col index statistics canada 1995 the international guideline for consumer price indexes the ilo manual turvey 1989 does not even mention the col index the question has taken on heightened interest recently part of the stimulus comes from the european union s relatively new harmonised indexes of consumer prices hicp for the hicps eurostat has rejected the col

purchasing power parity over two centuries strengthening the case for real exchange rate stability a reply to cuddington and liang cuddington and liang 2000 purchasing power parity over two centuries journal of international money and finance 19 751 755 examine the long span of sterling dollar real exchange rate data of lothian and taylor 1996 real exchange rate behavior the recent float from the perspective of the past two centuries journal of political economy 104 488 509 and claim to reject long run purchasing power parity by fitting time trends or by considering very high order autoregresssive representations this reply demonstrates however that the central claims of lothian and taylor are in fact strengthened by the implications of cuddington and liang s analysis in that while the economic importance of introducing trend terms is slight this leads to a faster estimated speed of mean reversion c 2000 elsevier science ltd all rights reserved jel classification f31 f41 c22

tests of the different variants of the monetary model in a developing economy malaysian experience in the pre and post crisis periods this study examines the validity of four different variants of the monetary model of exchange rate determination for malaysia covering both the pre and post crisis periods using the vector error correction models the findings demonstrate that for both periods the variables used are cointegrated tests tend to suggest that of the four variants of monetary model the sticky price model holds in both periods and the flexible price model holds only in the post crisis period the proportionality between the exchange rate and relative money does not hold in any period the plotted actual and fitted exchange rates for both sub samples show that the models are able to track the actual exchange rate trend quiet well

a panel project on purchasing power parity mean reversion within and between countries abstract previous time series studies have shown evidence of mean reversion in real exchange rates deviations from purchasing power parity ppp appear to have half lives of approximately four years however the long samples required for statistical significance are unavailable for most currencies and are potentially inappropriate because of regime changes in this study we re examine deviations from ppp using a panel of 150 countries and 45 annual post wwii observations our panel shows strong evidence of mean reversion that is similar to that from long time series ppp deviations are eroded at a rate of approximately 15 annually i e their half life is around four years such findings can be masked in time series data but are relatively easy to find in cross sections

an economic evaluation of empirical exchange rate models this paper provides a comprehensive evaluation of the short horizon predictive ability of economic fundamentals and forward premiums on monthly exchange rate returns in a framework that allows for volatility timing we implement bayesian methods for estimation and ranking of a set of empirical exchange rate models and construct combined forecasts based on bayesian model averaging more importantly we assess the economic value of the in sample and out of sample forecasting power of the empirical models and find two key results 1 a risk averse investor will pay a high performance fee to switch from a dynamic portfolio strategy based on the random walk model to one that conditions on the forward premium with stochastic volatility innovations and 2 strategies based on combined forecasts yield large economic gains over the random walk benchmark these two results are robust to reasonably high transaction costs

aggregate price indices new goods and generics this paper examines the appropriate treatment in the cost of living index of the appearance of new varieties of old goods existing theory here applies to individual households thus we first show in what sense laspeyres and paasche indices for groups of households can be considered approximations to theoretically desirable group indices and then go on to the case of new goods we apply our results to the case of the introduction of generics in pharmaceuticals and show that proper treatment can make a considerable difference

the failure of the monetary exchange rate model for the canadian u s dollar in this paper the validity of the monetary exchange rate model in the long run for the canadian u s dollar exchange rate is examined the primary test employed is the johansen 1991 and johansen and juselius 1990 cointegration technique the effects of dummy variables and lag specification on the statistical inference are considered and monte carlo simulations based on the estimated parameters are employed despite the use of the longest data set yet for the canadian case no evidence is found in favour of the monetary exchange rate model using the johansen procedures this result is confirmed by several other cointegration procedures jel classification f31 f41 la faillite du modele monetaire du taux de change pour les dollars canadien et americain ce memoire examine le modele monetaire du taux de change pour savoir s il est valide par l experience canado americaine en longue periode le test principal utilise est la technique de cointegration de johansen 1991 et johansen et juselius 1990 les effets des variables fictives et de la specification de la structure de delais sur l inference statistique sont consideres et on utilise des simulations de monte carlo fondees sur les parametres calibres malgre le fait qu on fait appel a la plus longue serie chronologique utilisee dans ce type d analyse a ce jour on ne trouve aucun support du modele monetaire du taux de change en utilisant les procedures de johansen ce resultat est confirme par l utilisation de plusieurs autres procedures de cointegration

banking on currency forecasts how predictable is change in money abstract the paper examines the predictive performance of four structural exchange rate models using both parametric and nonparametric techniques error correction versions of the models are fit so that plausible long run elasticities can be imposed on the fundamental variables of each model a variety of model evaluation statistics are reported our findings confirm that fundamental exchange rate models forecast no better than a random walk model for short term prediction horizons for longer horizons error correction terms can explain exchange rate movements significantly better than a no change forecast for a subset of the models and currencies we consider

generics and new goods in pharmaceutical price indexes drug prices and their rate of inflation are a major focus of current policy debates on u s health care in this paper we show that where patent expiration and generic entry are significant as they are for many important classes of drugs movements in the official price indexes may be poor indicators of the actual prices paid and the resulting changes in consumer welfare when a drug goes off patent those consumers who regard the branded and generic versions as more or less perfect substitutes experience a substantial price decline and concomitant welfare gain which the current methods used by the statistical agencies fail to capture we suggest a number of alternative ways of proceeding although our computations are based on a limited number of cases they imply that the overall rate of inflation in drug prices may be quite seriously overstated while generic pharmaceuticals are the topic of our calculations the problem discussed is also of wider importance generic drugs are a special and possibly easy case

measuring the substitution bias in japan the demand system approach and a superlative index this study estimates the demand system using japanese micro data and calculates the cost of living index coli to assess the substitution bias in the consumer price index the estimated bias during the sample period of 1982 2000 is about 0 06 percentage points which is larger than the estimates calculated from a superlative index the difference between the coli and a superlative index can be explained with the upward movements of the average utility level in japan since the cost of living for the rich has grown more rapidly than that for the poor

consumer shopping behavior how much do consumers save this paper documents the potential and actual savings that consumers realize from four particular types of purchasing behavior purchasing on sale buying in bulk at a lower per unit price buying generic brands and choosing outlets how much can and do households save through each of these behaviors how do these patterns vary with consumer demographics we use data collected by a marketing firm on all food purchases brought into the home for a large nationally representative sample of u k households in 2006 we are interested in how consumer choice affects the measurement of price changes in particular a standard price index based on a fixed basket of goods will overstate the rise in the true cost of living because it does not properly consider sales and bulk purchasing according to our measures the extent of this bias might be of the same or even greater magnitude than the better known substitution and outlet biases

fiscal deficits and mean reversion in real exchange rates the mean reversion of real exchange rates in g5 countries depends on both countries fiscal deficits surplus in a nonlinear way when the fiscal policy pushes the real exchange rate to be deviated further away from the equilibrium level the mean reversion process is faster

the contribution of economic fundamentals to movements in exchange rates starting from the asset pricing approach of engel and west we examine the degree to which fundamentals can explain exchange rate fluctuations we show that it is not possible to obtain sharp inferences about the relative contribution of fundamentals using only data on observed monetary fundamentals money minus output differentials across countries and exchange rates we use additional data on interest rate and price differentials along with the implications of the monetary model of exchange rates to decompose exchange rate fluctuations in general we find that money demand shifts along with observed monetary fundamentals are an important contributor to exchange rate fluctuations

getting prices right what should be done much of the profession accepts that the cpi likely overstates the rate of increase of the cost of living it is less clear that there are sound and feasible steps that the bls can adopt to improve matters in the short run there are unresolved conceptual and identification problems in the measurement of quality superlative price indexes are not feasible and feasible approximations are not superlative and may not even be better the need for a single index that aggregates over heterogeneous consumers with different incomes tastes and needs casts serious doubt on the cost of living approach

the monetary model of the exchange rate long run relationships short run dynamics and how to beat a random walk abstract the monetary model is re examined for the sterling dollar exchange rate first it is demonstrated using a multivariate cointegration technique that an unrestricted monetary model is a valid framework for analyzing the long run exchange rate second we find once proper account has been taken of the short run data dynamics that an unrestricted monetary model outperforms the random walk and other models in an out of sample forecasting contest jel f31

searching for stationarity purchasing power parity under the current float abstract using panel data methods we investigate long run purchasing power parity by testing for unit roots in real exchange rates of industrial countries under the current float the evidence against the unit root hypothesis is stronger for larger than for smaller panels for monthly than for quarterly data and when the german mark rather than the united states dollar is used as the base currency while we find that accounting for serial correlation considerably weakens the evidence against the unit root null the results as a whole are consistent with long run purchasing power parity

the behaviour of the us consumer price index 1913 2003 a study of seasonality in the monthly us cpi this article analyses the seasonality in the monthly consumer price index cpi over the period january 1913 to december 2003 we examine three types of month effects if the mean of monthly cpi changes of the entire data set and of a given month were significantly different from zero if the mean of monthly cpi changes of a given month was different from the mean of the other months and if the variance of the monthly cpi changes for a given month was different from the variance of the other months the mean of monthly cpi changes for the entire data set 0 27 was found to be significantly greater than zero the means of monthly changes show a downward trend from september to december when the data are sliced into three sub periods we find an increasing trend in the means and medians of monthly changes but a decreasing trend in the sds of the monthly changes the mean of monthly cpi changes during the republican presidencies 0 15 was significantly lower than during the democratic presidencies 0

exchange rates and fundamentals under adaptive learning abstract this paper studies a monetary model that is standard in all respects except that market participants have incomplete knowledge about the economic structure and employ adaptive learning rules to learn about the economic environment market participants also must contend with unannounced regime shifts simulation results suggest that the models under adaptive learning especially constant gain learning combined with a structural change dominate the alternative specifications of expectations in their ability to account for why fundamentals predict exchange rate returns over long horizons but not over short horizons and for generating excessively volatile returns and persistent deviations of the exchange rate from the monetary fundamentals

quality corrected price indices the case of the dutch new passenger car market 1990 1999 market dynamics and technological developments constitute a major challenge to the proper measurement of the price evolution of durable goods in this study hedonic methods are used to estimate quality corrected price indices of new passenger cars in the netherlands 1990 1999 use is made of a huge set of price quantity and quality information about 11 000 car models obtained from different sources during the observation period the nominal price level of all available car models increased about 20 on average while the shares of car models with airbags tinted glass and power steering increased from almost nothing to about 90 matched model price indices and the official cpi for new passenger cars which partially account for quality adjustments estimate the price increase to be equal to 10 6 14 2 respectively 11 2 for the 1990 1999 period by contrast the hedonic fisher like price indices based on the preferred annually estimated brand weighted semi log hedonic model lead to price changes var

working to improve the consumer price index he recent report of the advisory commission appointed by the u s senatefinance committee begins with one overarching recommendation thebls should establish a cost of living index coli as its objective in mea suring consumer prices u s senate 1996 p 2 this seems basically right to us indeed the bls has long said that the cost of living framework guides operationaldecisions about the construction of the index gillingham 1974 u s bureau oflabor statistics 1984 1988 1992 1997a putting things slightly differently if thebls staff or other technical experts knew how to produce a true cost of living indexon a monthly production schedule that would be what we would produce althoughwe have no fundamental disagreement with the commission about what the objec tive of the cpi program ought to be we may disagree to some extent about theapproaches and methods that are appropriate and feasible in working toward thatobjective this is a point to which we will return below our rst purpose in the present paper is to comment on the advisory com mission s report and the recommendations it contains