Generalized Impulse Response Functions Research Articles

Asymmetries in the dynamic interrelationship between energy consumption and economic growth: Evidence from Turkey

In this study we examine possible nonlinearities in dynamic interrelationship between energy consumption and economic growth in Turkey for the 1960–2010 period by using a smooth transition vector autoregressive model. In order to trace the effects of one variable on another, we calculate Generalized Impulse Response Functions (GIRFs). The computed impulse response functions demonstrate asymmetric effects of positive versus negative and small versus large energy consumption shocks on output growth and vice versa. Specifically, we find that negative energy shocks have a greater effect on output growth than positive energy shocks, and that big negative energy shocks affect output much more than small negative energy shocks. Similarly, we find that positive output shock has a greater effect on energy consumption whereas negative shocks have almost no effect on energy consumption. The results of this study have clear and important implications for energy economists and policymakers in Turkey.

BILATERAL TRADE BALANCE OF MALAYSIA TO THE UNITED STATES, JAPAN AND SINGAPORE: AN EMPIRICAL STUDY

This study examines the long-run and short-run impact of real exchange rate on bilateral trade balance of Malaysia to the United States (US), Japan and Singapore using monthly data over the period 1976:1-2004:11. Moreover, this study examines the impact of the implementation of fixed exchange rate in Malaysia in 1994 and the Asian financial crisis (1997-1998) as well as the implementation of fixed exchange rate in Malaysia after the crisis on bilateral trade balance. The generalised impulse response function is estimated to investigate the dynamics of bilateral trade balance to a shock in real exchange rate. This study finds that there is a long-run relationship among bilateral trade balance, real exchange rate, domestic income and foreign income. The generalised impulse response function shows that the J-curve phenomenon is found in the short run, particularly for the whole sample period. In the long run, depreciation or devaluation of exchange rate will improve bilateral trade balance. Thus, Marshall Lerner condition holds.

Environmental Pollution and Economic Growth

This paper utilize generalized impulse response function of the VAR model and variance decomposition method to investigate the effects of long-term dynamic characteristics between environmental pollution indicators and GDP per capita in 11 provinces of western China in the 1992-2010.Impulse response analysis showed that:on the one hand economic growth is a major cause of environmental pollution.Environmental pollution on the other hand, economic growth, there are also a reverse effect.however, this force has a certain lag effect. Variance decomposition results show that although environmental pollutionis an important variable to forecast economic growth, the economic growth has little contribution to explain various types of environmental pollution predictor.

The dynamics of spillover effects during the European sovereign debt turmoil

In this paper we modify and extend the framework of Diebold and Yilmaz (2011) to quantify spillovers between sovereign credit markets and banks in the euro area. Spillovers are estimated recursively from a vector autoregressive model of daily changes in credit default swap (CDS) spreads with exogenous common factors. We account for interdependencies between sovereign and bank CDS spreads and derive generalized impulse response functions. Specifically, we assess the systemic effect of an unexpected shock to the creditworthiness of a sovereign or country-specific bank index on other sovereigns and bank CDSs between October 2009 and July 2012. Channels of shock transmission from or to sovereigns and banks are summarized in a Contagion Index and its four components: (i) among sovereigns, (ii) among banks, (iii) from sovereigns to banks, and (iv) from banks to sovereigns. We also highlight the impact of policy-related events on the Contagion Index.

Institutional Capacity and Macroeconomic Performance: Empirical Evidence from Nigeria

The paper aimed at empirically investigating the impact of institutional capacity on macroeconomic performance of the Nigerian economy for the period 1961-2011. The analysis is based on a multivariate vector error correction model. The empirical results confirm co-integration relationship between institutional capacity, fiscal-monetary policy mix and macroeconomic performance. Results of the generalized impulse response functions suggest that one standard deviation innovation on institutional capacity reduces macroeconomic performance in the short, medium and long term, while results of the variance decomposition indicate that a significant variation in Nigeria’s macroeconomic performance is not attributable to changes in the capacity of institutions, based on the proxy employed. It is recommended that for macroeconomic performance to be improved and sustained, mechanisms which deliberately seek to enhance institutional capacity, with a view to stimulating growth and providing the impetus for the achievement of macroeconomic objectives in the short, medium and long term horizons be instituted and vigorously pursued.

Government debt in Greece: An empirical analysis

Greek government debt has been increasing above the percentage stated in the growth and stability path from 112.9% in 2008 to 175.6% in 2013. This paper investigates the determinants of the general government debt in Greek by means of Vector Error Correction Model framework, Variance Decomposition and Generalized Impulse Response Function Analysis. The analysis showed a significant negative relationship between general government debt and government deficit, general government debt and inflation. Shocks to general government and inflation will cause general government debt to increase. Government deficit should be increased since there is gross capital formation included in its calculation which could be invested in income generating projects. The current account balance should be reduced by improving the net trade balance

Generalized impulse response analysis: General or Extreme?

Esta nota analiza la limitación de utilizar la función generalizada de impulso- respuesta (FGIR) de los modelos autoregresivos VAR (Pesaran y Shin, 1998). El FGIR es invariante al orden del rezago de las variables asociadas al modelo VAR . De hecho, el FGIR produce un conjunto de funciones respuestas con base a supuestos de identificación extremos que se contradicen entre ellos, a menos que la matriz de covarianza sea diagonal. Con la ayuda de ejemplos empíricos, la presente nota demuestra que el FGIR puede generar inferencias incorrectas.

Study on the Economic Growth and Industrial Waste Water Based on the VAR Model

Based on the VAR model, the long term dynamic relation between economic growth and industrial waste water is analyzed by using co-integration analysis and granger causality test, generalized impulse response function and variance decomposition method in Nanjing, and the related data of industrial waste and GDP indices from 1982 to 2011. The empirical results show that between economic growth and industrial waste water pollutant discharge has a two-way mechanism, but industrial waste water pollutants on the reaction mechanism of economic growth is weak, and there is a certain lag. This conclusion can provide a great reference value for promoting sustainable economic development and formulating relevant environmental policy for Nanjing.

Bilateral J-Curve between India and Her Trading Partners: A Quantitative Perspective

This study examines the short-run and long-run effects of real exchange rate changes on India’s trade balance vis-à-vis four of her major trading partners, viz., the US, the UK, Japan and Germany within a cointegrating vector error correction model. Cointegration estimates suggest a long-run equilibrium relationship among trade balance, real exchange rate, domestic and foreign income in each country. This study also applied generalized impulse response functions to trace the effect of a one-time shock to the real exchange rate on trade balance. Although considerable variations exists in the results, overall, the generalized impulse response functions suggest that J-curve effect is visible in India’s bilateral trade with both Japan and Germany, but the Marshall-Lerner condition appears to hold in the context of India-Germany trade. On the contrary, we did not get J-curve in India’s trade with the US, and the UK, rather we got S-curve effect in India-UK trade.

Household Savings in South Africa: An Econometric Analysis

This paper examines the determinants of household savings in South Africa by utilizing time series data from the South African Reserve Bank. The household savings model is estimated by using the cointegrating vector autoregressive (CVAR) framework. To check robustness on the cointegration results, we employ generalized impulse response function (GIRF) analysis and variance decomposition. The findings show that all the variables have unit roots and cointegration emphasizes the presence of a long run equilibrium relationship. The results indicate that household savings is mainly influenced by a high level of household debt. DOI: 10.5901/mjss.2013.v4n13p519

El Nino Southern Oscillation and the fishmeal-soya bean meal price ratio: regime-dependent dynamics revisited

The El Nino Southern Oscillation (ENSO) impacts commodity production and prices around the world. This study revisits fishmeal–soya bean meal price ratio dynamics and examines it in relation to the ENSO anomalies. A smooth transition autoregressive modelling framework is applied to assess nonlinearities in the ENSO–price ratio relationship, and generalised impulse–response functions and derived asymmetry functions are utilised to illustrate characteristic features of the estimated model dynamics. The results suggest economically meaningful impacts of ENSO on the price ratio dynamics, and indicate statistical significance of these effects for up to one year after the ENSO shocks.

Shocks and Household Debt in South Africa: A Variance Decomposition and GIRF Analysis

A crucial boost in the household debt to income ratio was experienced among South African households since the incident of the 2007-2008 US subprime mortgage crisis which later plummeted into the 2008-2009 financial crisis. The key focus of this paper is to investigate how the South African household debt might respond to shocks over a significant time horizon. We analysed the data of seven real macroeconomic variables from 1985 Q1 to 2012 Q1. The Variance Decomposition and the Generalized Impulse Response Function analyses are respectively utilized over a time horizon of five years (20 quarters) to investigate the contributions of each variable in explaining the variation in household debt levels and to assess the impact of household debt to various shocks. The statistical software package EViews 7 is used to conduct the variety of tests used in this study. The outcome of the Variance Decomposition reveals that disparities in the level of household debt in South Africa can be mostly elucidated by contributions in house prices, household income, gross domestic product and prime rate. Vis-à-vis the GIRF analysis, the outcome supports the findings of a significant positive response of household debt to a shock from house prices and household consumption. These outcomes reflect the expectations from the theory of the life cycle hypothesis. In regards to the accuracy and consistency of our analysis, we support its use to assist decision making vis-à-vis lowering household debt levels in the South African economy. DOI: 10.5901/mjss.2013.v4n3p379

Transmission Of Volatility Shocks Between The Equity And Foreign Exchange Markets In South Africa

<p>The paper assesses the dynamic interaction between exchange rates and stock market volatility in South Africa by making use of the generalised impulse response function obtained from a bivariate VAR model. Volatility variables in the VAR system are obtained from a family of GARCH models based on criteria such as covariance stationarity and leverage effects. The findings of the paper show that foreign exchange conditional volatility responds positively to volatility shocks to the equity market. Nonetheless, the response of the equity market conditional volatility to volatility shocks to the foreign exchange market is short-lived and neutral for most of the time horizon periods. The paper attributes this finding mainly to the extent of foreign participation in emerging equity market in general and the South African equity market in particular.</p>

Stock Market Performance: Variance Decomposition of Price-Earnings Ratio, Dividend Yield and Tobin's Q

This study examines the relative importance of percentage change in price-to-earnings ratio (PE), percentage change in dividend yield (DY) and change in aggregate Tobin’s q ratio (∆TBQ) in forecasting returns on the S&P 500 (SP). The results from the variance decomposition analysis of quarterly data from 1951Q4 to 2012Q4 show that ∆TBQ beats out PE and DY in forecasting SP. While PE and DY together only forecast about 3.2% of SP at the two-quarter to eight-quarter horizons, ∆TBQ does so at about 66%. The Granger-causality test results reveal that ∆TBQ Granger-causes PE and DY. The generalized impulse response functions of the three variables are also estimated.

Dynamic effect of Tobin's Q on price-to-earnings ratio

Purpose – The purpose of this paper is to investigate the dynamic effect of Tobin's q ratio on price-to-earnings (PE) ratio. Design/methodology/approach – The objective of this study is to investigate the dynamic effect of Tobin's q on PE ratio. To achieve this objective, a vector autoregressive analysis (Equation (1)) is employed to analyze the quarterly data from 1951Q4 to 2012Q4 to determine the generalized impulse response functions and perform the variance decomposition of Tobin's q ratio on PE ratio. The Granger causality Wald test is performed to determine if Tobin's q ratio causes PE ratio and vice versa. Findings – Based on the analysis of the quarterly market-level data from 1951Q4 to 2012Q4, the results show that PE ratio significantly drops immediately following the shock to the change in Tobin's q ratio. The results from the Granger-causality test indicate that Tobin's q ratio change causes PE ratio to drop. There is not a reverse causation from PE ratio to Tobin's q ratio change. The variance decomposition results reveal that Tobin's q ratio change forecasts about 67.53 to 67.78 percent of PE ratio at the two-quarter to eight-quarter horizons. Originality/value – Up to this point, there is not a single study in the literature investigating the relationship between Tobin's q and PE ratios. Consequently, the current study is set up to investigate the dynamic effect of Tobin's q ratio on PE ratio. A major contribution of this study is to provide empirical evidence of the dynamic effect of Tobin's q ratio on PE ratio.

Evaluating the Mechanism of Oil Price Shocks and Fiscal Policy Responses in the Malaysian Economy

The paper aims to explore the symmetric impact of oil price shock on economy, to understand its mechanism channel and how fiscal policy response towards it. The Generalized Impulse Response Function and Variance Decomposition under the VAR methodology were employed. The empirical findings suggest that symmetric oil price shock has a positive and direct impact on oil revenue and government expenditure. However, the real GDP is vulnerable in a short-term but not in the long term period. These results would confirm that fiscal policy is the main mechanism channel that mitigates the adverse effects oil price shocks to the economy.

The Impact of Unemployment Rate on the Size of Romanian Shadow Economy

This article estimates the size of the Romanian shadow economy (SE) using the currency demand approach, in order to evaluate if there is any relationship between the SE and unemployment rate (UR). Using Granger causality tests and error correction models, we examine the impact of both registered and International Labour Office unemployment rates (ILO_UR) on the Romanian SE covering the period between 2000Q1 and 2010Q2. We find that the Romanian SE as a percentage of official gross domestic product (GDP) is decreasing over the analyzed period, from 36.5 percent at the end of 2000 to 31.5 of real GDP at the middle of 2010. Our empirical results also support a unidirectional Granger causality that runs from the URs to the SE. The generalized impulse response functions indicate the existence of a short-run negative relationship between URs and the Romanian SE. The empirical results also indicate that there is a positive long-run relationship between both URs and SE, with a 1 percent increase in URs leading to an increase in the SE of 0.36 percent due to the registered unemployment rate and an increase of 2.27 percent due to the ILO_UR.

Urban sprawl and municipal budgets in Spain: A dynamic panel data analysis

AbstractUrban sprawl has recently become a matter of concern throughout Europe, but it is in southern countries where its environmental and economic impact has been most severe. This low‐density, spatially expansive urban development pattern can have a highly marked impact on municipal budgets. Thus, local governments may see sprawl as a potential source of finance, in terms of building‐associated revenues and increased transfers from upper tiers of government. At the same time, sprawl leads to increased levels of expenditure, as it may raise the provision costs of certain local public goods and requires greater investment in extending basic infrastructure for new urban development. What, therefore, is the net fiscal impact of urban sprawl? Do local governments consider the long‐run net fiscal impact of new urban growth or do they simply focus on its short‐term benefits, ignoring future development costs? This paper addresses these questions by analysing the dynamic relationship between urban sprawl and local budget variables. To do so, we estimate a panel vector autoregressive model using data for 4,000 Spanish municipalities for the period 1994–2005. Computed generalized impulse response functions show: (i) that sprawl considerably increases demand for new infrastructure; (ii) that the capital deficit generated by this new infrastructure is covered in the main by intergovernmental transfers and, to a lesser extent, by revenues linked to the real estate cycle; and (iii) that sprawl leads to a short‐term current surplus, as the increase in current revenues offsets the increase in current expenditures due to public service provision for new developments. Overall, these findings point to a moral hazard problem for local governments in which inordinate intergovernmental transfers and development revenues encourage excessive urban sprawl.

Oil price shocks and stock market behaviour in Nigeria

PurposeThe purpose of this study is to investigate the interactive relationships between oil price shocks and the Nigeria stock market.Design/methodology/approachThe paper applied the multivariate vector auto‐regression that employed the generalized impulse response function and the forecast variance decomposition error.FindingsEmpirical evidence reveals that stock market returns exhibit insignificant positive response to oil price shocks but reverts to negative effects after a period of time depending on the nature of the oil price shocks. The results are similar even with the inclusion of other variables. Also, the asymmetric effect of oil price shocks on the Nigerian stock returns indices is not supported by statistical evidences.Originality/valueThis is the first study to examine the dynamic linkages between stock market behaviour and oil price shocks in Nigeria.

Bayesian Analysis of Nonlinear Exchange Rate Dynamics and the Purchasing Power Parity Persistence Puzzle

We investigate the persistence of real exchange rates using Bayesian methods. First, an algorithm for Bayesian estimation of nonlinear threshold models is developed. Unlike standard grid-based estimation, the Bayesian approach fully captures joint parameter uncertainty and uncertainty about complicated functions of the parameters, such as the half-life measure of persistence based on generalized impulse response functions. Second, model comparison is conducted via marginal likelihoods, which reflect the relative abilities of models to predict the data given prior beliefs about model parameters. This comparison is conducted for a range of linear and nonlinear models and provides a direct evaluation of the importance of nonlinear dynamics in modeling exchange rates. The marginal likelihoods also imply weights for a model-averaged measure of persistence. The empirical results for real exchange rate data from the G7 countries suggest general support for nonlinearity, but the strength of the evidence depends on which country pair is considered. However, the model-averaged estimates of half-lives are uniformly smaller than for the linear models alone, suggesting that the purchasing power parity persistence puzzle is less of a puzzle than previously thought.