Abstract
IN an earlier study, Hodgson and Holmes (1977) provided empirical evidence on the structural stability of short-term capital flow using the case of U.S.-Canadian net bank claims for the period 1955-I to 1974-I.1 Their findings indicated that the short-term capital flow underwent a significant structural change, and that the instability in the short-term capital flow may have been due to changes in interest rate sensitivity over time. However, as Garbade (1977) shows, the test procedure used by Hodgson and Holmes, labeled the cusum of squares test, has limitations for detecting structural change in the coefficients. The primary purpose of this paper is to present additional empirical evidence on the stability of U.S.-Canadian capital flow, obtained not only from the cusum of squares test, but also from the variable parameter regression technique. The use of the latter test is well justified in that it is somewhat more powerful and has the advantage of being able to isolate instability in individual regression coefficients. In section I we develop an analytical framework for short-term capital flow based on the portfolio balance approach. Section II presents the regression results for the U.S.-Canadian short-term capital flow. In section III we present a brief and heuristic description of the two stability test procedures as well as the results of these tests. Major conclusions are presented in section IV.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.