Long-run Co-movements Research Articles

Cointegration of price measures: Evidence from the G-7

This study addresses index-dependency of empirical results associated with the purchasing power parity (PPP) relationship. Using four key price indices involving the G-7 nations, empirical tests for long-run co-movement are conducted. A test for linear restrictions is imposed. The speeds of adjustment are calculated for statistically significant linear combinations. The speed of the short-run response to disequilibrium differs both within and across countries. The seven-country average reveals that the CPI has the quickest recovery response to a one-time disturbance. The findings suggest that PPP results are not dependent upon the choice of index when an explicit set of indices is cointegrated.(JEL F3)

Identifying price linkages: a review of the literature and an application to the world market of cotton

This paper reviews the literature of price linkages and examines the degree to which cotton prices are linked; it also tests whether such linkages have improved over the last decade. It concludes that the degree of linkage has improved over the last decade while the main source of this improvement appears to be a result of short-run price transmission and to a lesser extent long-run co-movement.

Common cycles and the importance of transitory shocks to macroeconomic aggregates

Although there has been substantial research using long-run co-movement (cointegration) restrictions in the empirical macroeconomics literature, little or no work has been done investigating the existence of short-run co-movement (common cycles) restrictions and discussing their implications. In this paper we first investigate the existence of common cycles in a aggregate data set comprising per-capita output, consumption, and investment. Later we discuss their usefulness in measuring the relative importance of transitory shocks. We show that, taking into account common-cycle restrictions, transitory shocks are more important than previously thought at business-cycle horizons. The central argument relies on efficiency gains from imposing these short-run restrictions on the estimation of the dynamic model. Finally, we discuss how the evidence here and elsewhere can be interpreted to support the view that nominal shocks may be important in the short run.

Factor Price Equalization? The Cointegration Approach Revisited

Factor price equality across countries is an important implication of the Heckscher-Ohlin-Samuelson model of international trade. Although an influential theoretical result, the model has received surprisingly little empirical support. Burgman and Geppert (1993) argue that this might be due to the neglect of the non- stationarity property of the time series under consideration. Using a cointegration approach, they find strong evidence pointing towards a long-run relationship between factor prices in six major industrialized countries. The present paper shows, however, that there is only limited evidence of cointegration once the finite sample bias is taken into account. Moreover, there is only weak evidence of a significant cointegrating relationship when real (rather than nominal) labor cost data are used. There is some indication of long-run co-movements of real factor prices when using the statistically more powerful bivariate tests rather than a multivariate framework.

Stock Prices and Exchange Rate Dynamics

We study the long-run and short-run dynamics between stock prices and exchange rates and the channels through which exogenous shocks impact on these markets. We apply the analysis to a group of Pacific Basin countries and examine whether foreign exchange controls and the Asian financial crisis of mid 1997 affected the links between the markets. The evidence shows that the US stock market acts as a conduit through which the foreign exchange market and the local stock markets are linked. It also provides support for a close relationship between financial and economic integration. Finally, the evidence shows that the financial crisis had a temporary effect on the long-run comovement between the various markets.

Testing PPP for Asian economies during the recent floating period

The validity of purchasing power parity (PPP) is examined between seven Asian countries and the US during the flexible exchange rate period, in the framework of the Johansen cointegration approach with and without restrictions of the PPP parameters. It is found that a long-run comovement exists between the nominal exchange rate and the prices, but the PPP vector does not exist in the cointegration space and the nominal exchange rate and domestic and foreign prices do not move one by one as implied by the theoretical PPP.

The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates

The relationship between international payments and the real exchange rate--the transfer problem--is a classic question in international economics. We use new data on countries' net external positions together with real exchange rate data to shed light on this question. We present a model yielding testable implications on the long-run co-movements of real exchange rates, external positions, relative GDP and terms of trade, and cross-country and time-series evidence on the subject. Countries with net external liabilities are found to have more depreciated real exchange rates, with the main channel of transmission working through the relative price of nontraded goods.

The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates

The relationship between international payments and the real exchange rate—the “transfer problem”—is a classic question in international economics. We use new data on countries’ net external positions together with real exchange rate data to shed light on this question. We present a model yielding testable implications on the long-run co-movements of real exchange rates, external positions, relative GDP and terms of trade, and cross-country and time-series evidence on the subject. Countries with net external liabilities are found to have more depreciated real exchange rates, with the main channel of transmission working through the relative price of nontraded goods.

The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates

The relationship between international payments and the real exchange rateiXthe transfer problem- is one of the classic questions in international economics. In this paper we use cross-country data on real exchange rates and a newly constructed data set on countries' net external positions to shed new light on this old question. We present a simple theoretical framework that leads to empirically testable implications for the long-run co-movements of real exchange rates, net foreign assets, relative GDP and the terms of trade, and cross-country and time-series evidence on the subject. We show that, on average, countries with net external liabilities have more depreciated real exchange rates, and that the main channel of transmission seems to work through the relative price of nontraded goods, rather than through the relative price of traded goods across countries.

Real exchange rates and nontradables: A relative price approach

In this paper, we study long-run comovements of real exchange rates and relative prices of nontradables and tradables. This approach is complementary to many existing approaches to investigating real exchange rate movements. In many theoretical models of exchange rate determination, the relative prices of nontradables and tradables are linked to the real exchange rates by identities. However, they do not necessarily move with real exchange rates in reality because of many factors. For example, many tradables contain nontradable components in the form of retailing services, so that Purchasing Power Parity (PPP) may not hold for these tradable goods even in the long run. Hence real exchange rates may not move in the direction predicted by theoretical models when the producers of these tradable goods experience changes in productivity. In this paper, we identify time periods, countries and relative price measures for which comovements between real exchange rates and relative prices of nontradables and tradables are observed.

Capital market integration in the Pacific Basin region: an impulse response analysis

We examine the extent of capital market integration in a group of Pacific Basin countries following the deregulation of their markets, and explore whether the financial influence of Japan in the region has overtaken that of the US. Looking at long-run comovements of real interest rates through the use of cointegration, and using impulse response analysis to examine the speed of adjustment of real interest rates to long-run equilibrium following a shock in one of the markets, which is another indicator of the degree of capital market integration, we find that these countries are closely linked with world financial markets and more so with Japan than with US.

Comovements Between Diffusion Processes

The aim of this paper is to characterize and analyze long-run comovements among diffusion processes. Broadly speaking, if X = (X1,,X2,;t ≥ 0) is a nonergodic diffusion in R2, but there exists a linear combination, say, γ′X, that is instead ergodic in R, then we say there exists a linear stochastic comovement between the components of X. Linear diffusions exhibiting stochastic comovements admit an error correction representation. Estimation of γ and hypothesis testing, under different sampling schemes, are considered.

The role of seasonality in economic time series reinterpreting money-output causality in U.S. data

While empirical evidence on the relationship between money and income has mainly been presented using seasonally adjusted data, seasonally unadjusted data are used in this paper to examine the time series behaviour of money, real GNP and industrial production, at both the seasonal and zero frequencies, based on tests of cointegration and seasonal cointegration. Two important conclusions are reached in the paper. First, although the univariate time series properties of M1 and real GNP appear to be very similar at both the seasonal and zero frequencies, seasonal comovements of M1 and real GNP turn out to be different from long-run comovements. Second, when seasonally unadjusted data are used, there appears to be no long-run relationship between money (M1 or M2) and output in the sense that the null of no cointegration cannot be rejected. Moreover, there is evidence of some feedback from output to money so that money is not necessarily exogenous. Consequently, as we might lose a possibly important chain of causation from money to income by ignoring the information concerning seasonal fluctuations, this paper provides further evidence that researchers should use raw data instead of seasonally adjusted data for inference and forecasting purposes.

Co-movements of OECD growth cycles

The study is of short-run and long-run co-movements and convergence across 21 OECD real per capita outputs on a sample period spanning 1960 to 1992 using dynamic principal components analysis and coherence analysis. We reject the hypothesis of convergence, but find evidence for long-run growth cycles closely related across countries. In particular, the G5 group exhibits the highest degree of economic integration in the long run. The group of the original members of the Community also exhibits linkages at high and medium frequencies and represents the most homogeneous area in Europe in terms of output dynamics both in the long and short run.

World Commodity Prices as a Forecasting Tool for Retail Prices: Evidence from the United Kingdom

This paper investigates, using cointegration and Granger-causality techniques, whether a stable long-run co-movement exists between world commodity prices and U.K. retail prices, and whether short-run changes in commodity prices convey information about future movements in U.K. retail prices. The results show noncointegration and no unidirectional Granger causality from commodity to retail prices. These findings suggest that little may be gained from using developments in commodity prices to forecast movements in retail prices in the inflation-targeting framework followed by the U.K. monetary authorities.

World Commodity Prices As a Forecasting tool for Retail Prices: Evidence From the United Kingdom

This paper investigates, using cointegration and Granger-causality techniques, whether a stable long-run co-movement exists between world commodity prices and U.K. retail prices, and whether short-run changes in commodity prices convey information about future movements in U.K. retail prices. The results show noncointegration and no unidirectional Granger causality from commodity to retail prices. These findings suggest that little may be gained from using developments in commodity prices to forecast movements in retail prices in the inflation-targeting framework followed by the U.K. monetary authorities.

US real wages and imports

The time-series properties of imports and US real wages are examined and the interlinks between them for the period 1970 - 1994, during which import competition was claimed to be part of the reason for US real wage staggering. Aggregate measures of real wages are used along with various measures of imports. No long-run comovement is found for real wages and imports. Real wages and imports were mainly explained by the shocks to themselves. Historical decomposition of the series shows that, for the 1980s and early 1990s, real wages seemed to be mainly affected by aggregate US economic activities. During some periods, imports tended to increase real wages but the impact seems to be mixed. The findings do not support the claim that imports caused US real wage decline.

Estimating common sectoral cycles

We investigate in this paper the degree of short-run and long-run comovement in U.S. sectoral output data by estimating sectoral trends and cycles. A theoretical model based on Long and Plosser (1983) is used to derive a reduced form for sectoral outputs from first principles. Cointegration and common-cycle tests are performed; sectoral output data seem to share a relatively high number of common trends and a relatively low number of common cycles. A special trend-cycle decomposition of the data set is performed, and the results indicate a very similar cyclical behavior across sectors and very different behavior for trends. In a variance decomposition analysis, prominent sectors such as Manufacturing and Wholesale/Retail Trade exhibit relatively important transitory shocks.

Capital flows and stock price volatility: Evidence from Hong Kong

This paper investigates both the short-run dynamics and the long-run co-movement of stock prices, capital flows and the real interest rates in Hong Kong. By using the Johansen multivariate cointegration technique, this paper finds that there are two cointegration vectors among the variables. In other words, the results show that the three variables in Hong Kong are moving together. This long-run relationship implies that even the stock market is efficient in the short-run. Its long-run movement can, however, be predicted by the activities of the capital market.