Johansen Maximum Likelihood Research Articles

An empirical evaluation of export demand in China

Purpose– The purpose of this paper is to estimate the export demand equation for China with appropriate specification that incorporates exchange rate in the relative price variable. Design/methodology/approach – Alternative time series techniques such as general to specific and Johansen maximum likelihood are used with annual data from 1974‐2004. The augmented Dicky–Fuller and Elliot–Rothenberg–Stock methods are also employed to test the time series properties of the variables. Findings – The paper confirms that there is a cointegration relationship between real exports, real income and relative prices in China. The long‐run income elasticity is around 1.3 and the relative price elasticity is around −1.5. In addition, the export demand functions are temporally stable in China. Research limitations/implications – The structural breaks and trade shock analysis were ignored because that would have made this paper much longer. Practical implications – The results imply that exports are an engine of growth in China. China's exports are competitive in the international market and it has the option to devalue its currency to promote export earnings. However, the paper argues that in current global economic crises, trade promotion policies such as subsidies, tax exceptions and special credit lines should be encouraged. Originality/value – The paper assesses the magnitudes of export elasticities with a specification that includes exchange rate in relative price variable.

The Effect of Economic Factors on the Tax Ratio in Trinidad and Tobago

We focus on the potential economic factors of tax revenue in Trinidad and Tobago and present cointegration test statistics for a second order VAR(2) based on Johansen's maximum likelihood approach. Our results suggest a positive relationship between the level of income and the tax ratio and also that external debt and inflation impede the collection of taxes. Additionally, we find that the degree of openness exerts an insignificant impact on the tax ratio. Our study recommends potential areas that may be targeted in order to raise tax revenues and which may also raise the consciousness that tax reform is a very important subject matter.

Price and Non-Price Competitiveness of Exports of Manufactures

This paper develops a demand function for Greece's exports of manufactures according to New Trade Theory. The sample covers a rather long period of four decades with exports aggregated based on industrial rather than on trade classification. The study contributes to a better understanding of the effects of export prices, domestic and competitors', as well as of non-price competitiveness approximated with capital stock, on export performance. The empirical estimation uses the Johansen maximum likelihood approach in the long run and a dynamic error-correction equation in the short run. The estimated long-run and short-run relationships follow the economic theory and are remarkably stable. It is shown that non-price competitiveness plays a vital role in explaining export performance in the long run as well as in the short run and that failure to include it in the export equation may lead to mis-specification error. As opposed to conventional models of export demand where income effects are very high, in the present study foreign income has a moderately high effect on exports in the long run and no effect in the short run. Exports are also sensitive to domestic and competitors' prices in the long run, but cost and price competitiveness elasticities are close to one, indicating that Greek exporters have some ability to compete on the basis of prices.

An Empirical Study on the Long-Run Determinants of Exchange Rate

The behavior of exchange rates has been an important issue in the international finance literature. Although exchange rate is erratic and unpredictable in the short run, its long-run behavior is believed to be guided by economic fundamentals. This paper empirically tests the long-run determinants of the exchange rate by focusing on the Taiwan/US case. After incorporating productivity differential, foreign reserves, and monetary base in the absolute Purchasing Power Parity (PPP) proposition, where the relative price is the only determinant of the exchange rate, the Johansen's maximum likelihood test results indicate these determinants and the exchange rate are indeed cointegrated: thus a long-run relationship can be established.

Price and non-price competitiveness of exports of manufactures

This paper develops a demand function for Greece’s exports of manufactures according to New Trade Theory. The sample covers a rather long period of four decades with exports aggregated based on industrial rather than on trade classification. The study contributes to a better understanding of the effects of export prices, domestic and competitors’, as well as of non-price competitiveness approximated with capital stock, on export performance. The empirical estimation uses the Johansen maximum likelihood approach in the long run and a dynamic errorcorrection equation in the short run. The estimated long-run and short-run relationships follow the economic theory and are remarkably stable. It is shown that non-price competitiveness plays a vital role in explaining export performance in the long run as well as in the short run and that failure to include it in the export equation may lead to mis-specification error. As opposed to conventional models of export demand where income effects are very high, in the present study foreign income has a moderately high effect on exports in the long run and no effect in the short run. Exports are also sensitive to domestic and competitors’ prices in the long run, but cost and price competitiveness elasticities are close to one, indicating that Greek exporters have some ability to compete on the basis of prices.

Cointegration analysis on trading behavior in four SELECTED asean countries BEFORE MONETARY CRISIS

This paper aims to analyze Indonesian position among the trading behavior in four selected ASEAN countries (according to their import-and-export products) using cointegration analysis. The demands for export and import are estimated before the monetary crisis erupted (1963 – 1995) using the dynamic OLS (DOLS) method. The Johansen Maximum Likelihood (JML) approach is also employed to compare the results obtained. The results show that foreign income has a significant impact on export demand, suggesting that foreign disturbance in the form of economic activities is likely to be transmitted to these countries. The Marshall Lerner conditions are easily met for the cases of Malaysia and Thailand (DOLS and JML). For Indonesia and the Philippines, the sum of the price elasticities of export and import demand are less than unity. This can be explained by the J-curve, in which the currency depreciations will first worsen the trade balance before it improves, and it takes a long time to affect the trade balance.

Unemployment and crime: an empirical investigation

This paper examines the relationship between labour market conditions and various crime series in three Asia-Pacific countries: Australia, Japan and South Korea. Johansen's maximum likelihood cointegration tests are applied to annual, aggregate data to see whether there exists a long-run equilibrium relationship between unemployment and crime variables. In a society with a high unemployment rate, especially among young males, the opportunity cost of crime is relatively low so that criminal activities tend to increase. Although theoretically well-formulated, previous empirical studies of this hypothesis have yielded mixed evidence. The results of this study, however, appear to provide strong support for a long-run equilibrium relationship between unemployment and several crime series. This may be due to the use of cointegration method in the study, which is quite common in the area of economics and finance, but has not been applied extensively to the study of crime. Empirical support seems to be even stronger for the relationship between unemployment among young males and crime.

Intersectoral wage linkages: the case of Sweden

The purpose of this study is to investigate whether wage-setting in certain sectors of the Swedish economy affects wage-setting in other sectors. The theoretical background is the Scandinavian model of inflation, which states that wage-setting in the sectors exposed to international competition lead wage-setting in the sheltered sectors of the economy. The Johansen maximum likelihood cointegration approach is applied to quarterly data on Swedish sector wages for the period 1980:1–2002:2. Different vector error correction (VEC) models are created, based on assumptions as to which sectors are exposed to international competition and which are not. Granger causality tests are then carried out in the different restricted/unrestricted VEC models to test for sector wage leadership. The Granger causality tests provide strong evidence for the presence of intersectoral wage causality, but no evidence of a wage-leading role for the internationally exposed manufacturing sector.

Capital flight and external debt relationships in Tanzania before the enhanced HIPC debt initiative

This article investigates factors that influence capita/flight in Tanzania, with a special focus on external debt as one of such factors. In doing so the article assesses the feedhack effects and long run impacts of such variables using time series data covering the 1970-2000 period and employs a VAR methodology within the Johansen Maximum Likelihood framework. The findings show that the external debt budget deficit, interest rate differential and GDP growth are the major factors that influence capital flight from Tanzania.The use of Granger causality test also reveals the existence of bi-directional causality among some the variables. In a way policy implication, the study suggests the need for ensuring stable macroeconomic environment, particularly sound fiscal and monetary policies. sustainahle debt and high and stable economic growth if the country is to revese the flow of capital from Tanzania

Currency devaluation and output growth: new evidence from panel data analysis

Using panel data unit root tests and panel cointegration tests including Johansen maximum likelihood cointegration tests, as well as estimation techniques appropriate for heterogeneous panels such as fully modified OLS, this study examines the effect of currency devaluation on output expansion in a sample of eleven Asian countries over the period 1968–1999. The results suggest that, in the long run, output growth is affected by currency devaluation in the majority of countries under examination and in the panel as a whole. This finding stands at variance with other recent studies, which concluded that devaluation does not exert any important influence on aggregate output.

An Index of Openness and Its Relationship With Growth in India

Time-series work on trade policy and growth is handicapped by the difficulty of measuring 'trade policy'. Established definitions of trade orientation such as 'bias' or the 'effective rate of protection' are difficult to operationalise in a time-series context because of enormous data requirements. This paper tries to fill an important gap in the literature. For the first time it constructs a time-series index of openness for India based on the real exchange rate distortion, and then, using Johansen's maximum likelihood approach, examines its relationship with growth in India. It is found that while greater openness exercises a positive influence on growth, the effect of investment, contrary to conventional wisdom, is insignificant. This is in line with the Young-Currie-Kaldor view of endogenous growth which sees capital accumulation more as an effect than a cause of growth. This view is based on Adam Smith's famous dictum that the division of labour is limited by the size of the market. In this demand side approach, increasing returns result from greater specialisation, which in turn depends on the size of the market. The robustness of the results is reconfirmed by using the ARDL approach.

COINTEGRATION ANALYSIS OF TOURISM REVENUES BY THE MEMBER COUNTRIES OF EUROPEAN UNION TO GREECE

The countries of Europe and especially European Union member countries are, traditionally, amongst the most important tourism markets for Greece. The purpose of this article is to investigate the long-run changes in tourism revenues from European Union (EU) member countries to Greece. In order to explain tourism revenues we use a number of leading macroeconomic variables, including the real income of 15 EU member countries, the exchange rate, and some dummies, which examine the crises periods for tourism. The quarterly data that are used for this article cover the period from January 1960 to December 2000. The augmented Dickey-Fuller for unit root is examined in the univariate framework and Johansen's maximum likelihood procedure is used to test the cointegration method and to estimate the number of cointegrated vectors of ``VAR model''-Vector autoregressive processes. Error correction model is estimated to explain tourism revenues from European Union member countries to Greece. The results show that the real income of 15 EU member countries and the exchange rate have a positive effect on tourism revenues of Greece, whereas some political crises have a negative effect on them

Devalution, Output and Wages

This paper analyses the relationship between the real exchange rate, real wages and aggregate output. We present a model in which changes in aggregate output and in the real exchange rate precede changes in real wages, and where output is expected to positively affect real wages while changes in the real exchange rate are expected to negatively affect real wages. The empirical analysis is carried out for the case of Brazil, a country which has recently undergone an exchange-rate-based stabilization plan and where the impact of exchange rate anchoring on the real sector seems to be relevant. Using monthly data for the period 1985 to 2001, Granger causality tests and Johansen's Maximum likelihood estimates confirmed the assumptions of our model by showing that real wages are positively affected by output and negatively impacted by the real exchange rate in the long run. [F31, F41, J39]

A Reassessment Of Balance Of Payments Constrained Growth: Results From Panel Unit Root And Panel Cointegration Tests

The paper reassesses the empirical evidence for Thirlwall's law in seven industrial countries by using panel unit root and panel cointegration tests including Johansen maximum likelihood cointegration tests. Current practice restricts attention to time series residual based cointegration tests, which are known to have low power and are subject to normalization problems. Since economic time series are typically short, it is desirable to exploit panel data in order to draw sharper inferences. The empirical results reveal that imports are cointegrated with terms of trade and income (although residual-based tests indicate the opposite). We find that, with the exception of Australia, Thirlwall's law holds. [C22, C23, O40, O57]

Cointegration analysis of German and British tourism demand for Greece

Germany and Great Britain are traditionally two of the most important sources of tourism for Greece. The purpose of this paper is to investigate changes in the long-run demand for tourism to Greece by these two countries. In order to explain the demand for tourism, we are using a number of leading macroeconomic variables, including income in origin countries (Germany and Great Britain), tourism prices in Greece, and transportation cost and exchanges rates between the three countries. Annual data from the three countries, covering the period from 1960 to 2000, are employed. Augmented Dickey–Fuller test for unit root is examined in the univariate framework and Johansen's maximum likelihood procedure is used to test the cointegration method and to estimate the number of cointegrating vectors of VAR model. Error correction models are estimated to explain German and British demand for tourism to Greece.

Doomed to Deficits? Aggregate U.S. Trade Flows Re-examined

This paper examines the stability of import and export demand functions for the United States over the 1975q1-2001q2 period. Using the Johansen maximum likelihood approach, an export demand function is readily identified. In contrast, there appears to be a structural break in the import demand function in 1995; specifications incorporating this break pass tests for cointegration, although the price elasticity is not statistically significant. Only when excluding computers and parts from the import series is a stable import demand function detected. The resulting point estimates confirm the persistence of the income asymmetry first noted by Houthakker and Magee (1969), although in a slightly diminished form. One policy implication of these findings is that dollar depreciation - unaccompanied by a realignment of growth trends - is insufficient to substantially reduce the US trade deficit.

Doomed to Deficits? Aggregate U.S. Trade Flows Re-Examined

This paper examines the stability of import and export demand functions for the United States over the 1975q1–2001q2 period. Using the Johansen maximum likelihood approach, an export demand function is readily identified. In contrast, there appears to be a structural break in the import demand function in 1995; specifications incorporating this break pass tests for cointegration, although the price elasticity is not statistically significant. Only when excluding computers and parts from the import series is a stable import demand function detected. The resulting point estimates confirm the persistence of the income asymmetry first noted by Houthakker and Magee, although in a slightly diminished form. One policy implication of these findings is that dollar depreciation—unaccompanied by a realignment of growth trends—is insufficient to substantially reduce the U.S. trade deficit.

Valid Bayesian Estimation of the Cointegrating Error Correction Model

Two methods of identifying cointegrating vectors are commonly used: linear restrictions and the nonlinear method of Johansen's maximum likelihood procedure. That the linear method can produce invalid estimates while the Johansen approach always produces valid estimates has been recognized in several recent articles. Because all Bayesian studies to date have used linear restrictions, this article presents a Bayesian method for obtaining estimates of cointegrating vectors that will always be valid. In addition, it also presents an approach for evaluating the validity of linear restrictions.

THE WAGE GROWTH AND INFLATION NEXUS IN A DYNAMIC MULTIVARIATE CONTEXT: NEW EVIDENCE FROM GREECE

Different macroeconomic schools of thought have provided different explanations for the relationship between the price level and wage level. This paper investigates the linkages between price level and wage level employing quarterly data in Greece over the period 1980–98. To account for influences on the bivariate relationship of monetary and exchange rate policies, money supply and exchange rate were added to the model. In the empirical analysis the Johansen maximum likelihood technique is applied to search for a long-run relationship among the macroeconomic variables. The application of vector error-correction models is used to investigate the response of inflation and wage inflation to monetary and exchange rate policies aiming at testing the sources of price-wage variations. The estimation results employing the vector error-correction models indicate that a unidirectional causality exists from wages to price level. In addition, the results indicate that inflation in the long run is determined by changes in money supply and exchange rate. The results imply that since wages have an impact on price level, wage inflation can be used as monetary policy information variable. [C22, Å31]

Testing for cointegration between international stock prices

This paper re-examines the evidence for cointegration between international stock prices. It applies Johansen's maximum likelihood (ML) cointegration method and likelihood ratio (LR) tests for cointegration to stock prices. In monthly data it finds at most one cointegrating vector and in quarterly data finds no cointegrating vectors. Using the small-sample corrections or the small-sample critical values it finds no evidence of cointegration. Johansen's LR tests for cointegration are sensitive to the lag length specification in the VAR model. In general it finds more evidence of cointegration in higher order VAR models. The paper shows that some of the previous empirical results can be explained by the small-sample bias and size distortion of Johansen's LR tests for cointegration. It finds that international stock prices are not cointegrated.