Positive Long-run Relationship Research Articles

Envy, Guilt, and the Phillips Curve

We incorporate inequity aversion into an otherwise standard New Keynesian dynamic equilibrium model with Calvo wage contracts and positive inflation. Workers with relatively low incomes experience envy, whereas those with relatively high incomes experience guilt. The former seek to raise their income, and latter seek to reduce it. The greater the inflation rate, the greater the degree of wage dispersion under Calvo wage contracts, and thus the greater the degree of envy and guilt experienced by the workers. Since the envy effect is stronger than the guilt effect, according to the available empirical evidence, a rise in the inflation rate leads workers to supply more labor over the contract period, generating a significant positive long-run relation between inflation and output (and employment), for low inflation rates. This Phillips curve relation, together with an inefficient zero-inflation steady state, provides a rationale for a positive long-run inflation rate. Given standard calibrations, optimal monetary policy is associated with a long-run inflation rate around 2 percent.

Relationship between Trade Openness and Inflation: Empirical Evidences from Pakistan (1976-2010).

This study empirically verifies the existence of significant relationship between inflation and trade openness for Pakistan using annual time-series data for the period of 1976 to 2010. The basic objective of this study is to examine the Romer‘s hypothesis for Pakistan with real agriculture value added, real exchange rate, real gross domestic product, financial market openness, money and quasi money and used trade openness, import openness and export openness ratios separately as explanatory variables with inflation rate as dependent variables. For this purpose, we have used multivariate Johansen (1998) and Johansen and Juselius (1990) Maximum Likelihood Cointegration Approach and a Vector Error Correction Model (VECM) and the expected empirical findings shows that there is a significant positive long-run relationship between inflation and trade openness, which rejects the existence of Romer‘s hypothesis for Pakistan. JEL classification: B26, E31, P24, P44 Keywords: Trade Openness, Inflation, Unit Root Testing, Multivariate Cointegration Approach, Vector Error Correction Model, Pakistan

Federal legislative activism in Australia: a new approach to testing Wagner’s law

This paper considers the relationship between government growth and real GDP per capita by developing models of federal legislative output in Australia since 1901. Growth in legislation is found to be negatively related to growth in real income per capita in the short-run, implying that legislation responds to temporary economic shocks, but without a robust long-run relationship with the level of income. The growth in the number of pages of legislation enacted and legislative complexity also show a negative short-run relationship with growth in real national income per capita and a positive long-run relationship with the level of income.

THE DYNAMICS OF POST-WAR US INFLATION: THE LIMITED ROLE OF TIME INCONSISTENCY

In this paper we investigate whether the long-run relationship between inflation and unemployment has changed since Paul Volcker's appointment as Chairman of the Fed. Long-horizon vector autoregressive forecast errors provide evidence of a positive long-run relationship for the period of rising inflation, but no long-run relationship for the subsequent two decades of falling inflation. This suggests the model of discretionary monetary policy of Barro and Gordon (Journal of Political Economy, Vol. 91 (1983), pp. 589–610) is rejected in the latter period.

The Effects of Financial Innovation on Financial Savings: Evidence From an Economy in Transition

The general objective of this research is to establish the effects of financial innovations on financial savings in Ghana for the period 1963 to 2006. Both the perceptual index and M2/M1 that were used as proxies for financial innovation exhibited a positive long-run relationship but a negative short-run relationship. The crux of the study was that financial innovations led to a reduction in financial savings in the short run for one main reason—the prevailing innovative products in Ghana encouraged withdrawals rather than savings. Financial institutions, especially banks, are therefore encouraged to develop savings-related innovative instruments.

External asymmetries in the Euro-area and the role of Foreign Direct Investment

A few years after the establishment of the European Economic and Monetary Union (EMU), large asymmetries emerged in the trade balances and the current accounts of the member-states. A divide seems to separate two groups in the euro area, one with the northern countries achieving external surpluses and the other including the southern countries with large external deficits. We argue that a crucial factor in shaping productivity, and consequently affecting competitiveness and the external position of the economy, is the size and composition of Foreign Direct Investment (FDI) and find that the northern countries received more total FDI than the southern group. Moreover, the southern countries attracted more investment in real estate rather than the productive sector. Focusing on ten euro area economies over the period 1980-2009, we establish a positive relationship between FDI flows and trade balances in the northern countries, in contrast to a negative one for the southern group. Using industry-level data, we also establish a positive (negative) long-run relationship between FDI in the manufacturing (non-manufacturing) sector and the trade balance for the northern (southern) countries.

Malaysia's outward FDI: The effects of market size and government policy

This paper extends the empirical literature of Malaysia's outward FDI (OFDI) by considering the impact of foreign market size and home international reserves using multivariate cointegration and error-correction modeling techniques. The empirical results reveal that there is a positive long-run relationship between Malaysia's OFDI and its key determinants, viz. foreign market size, real effective exchange rate, international reserves and trade openness. The main findings suggest that apart from the market-seeking incentive and the adoption of outward-oriented policies, the Malaysian government could also encourage OFDI by implementing liberal policy on capital outflows. On the basis of these findings, we draw some policy implications for the country's economic development and the internationalization of Malaysian firms in the era of globalization.

Financial Development, Financial Fragility, and Growth

This paper studies the apparent contradiction between two strands of the literature on the effects of financial intermediation on economic activity. On the one hand, the empirical growth literature finds a positive effect of financial depth as measured by, for instance, private domestic credit and liquid liabilities (e.g.,Levine, Loayza, and Beck 2000). On the other hand, the banking and currency crisis literature finds that monetary aggregates, such as domestic credit, are among the best predictors of crises and their related economic downturns (e.g., Kaminski and Reinhart 1999). The paper accounts for these contrasting effects based on the distinction between the short- and long-run impacts of financial intermediation. Working with a panel of cross-country and time-series observations, the paper estimates an encompassing model of short- and long-run effects using the Pooled Mean Group estimator developed by Pesaran, Shin, and Smith (1999). The conclusion from this analysis is that a positive long-run relationship between financial intermediation and output growth co-exists with a, mostly, negative short-run relationship. The paper further develops an explanation for these contrasting effects by relating them to recent theoretical models, by linking the estimated short-run effects to measures of financial fragility (namely, banking crises and financial volatility), and by jointly analyzing the effects of financial depth and fragility in classic panel growth regressions.

Can common stocks provide a hedge against inflation? Evidence from African countries

The extent to which the stock market provides a hedge to investors against inflation is examined for African stock markets. By employing parametric and nonparametric cointegration procedures, we show that the point estimates of the elasticities of stock prices with respect to consumer prices range from 0.015 for Tunisia to 2.264 for South Africa, evidence of a positive long-run relationship. Further, the time path of the response of stock prices to innovations in consumer prices exhibits a transitory negative response for Egypt and South Africa, which becomes positive over longer horizons: important indication that the stock market tends to provide a hedge against rising consumer prices in African markets.

The long-run relationship between stock prices and goods prices: New evidence from panel cointegration

We examine the long-run relationship between stock prices and goods prices to gauge whether stock market investment can hedge against inflation. Data from 16 OECD countries over the period 1970–2006 are used. We account for different inflation regimes with the use of sub-sample regressions, while maintaining the power of tests in small sample sizes by combining time-series data across our sample countries in a panel unit root and panel cointegration econometric framework. The evidence supports a positive long-run relationship between goods prices and stock prices with the estimated goods price coefficient being in line with the generalized Fisher hypothesis.

Dynamic effects of trade openness on financial development

Abstract This paper employs the Pooled Mean Group (PMG) approach of Pesaran et al. (1999) to study the dynamic effects of trade openness on financial development. The advantage of the PMG estimator over other dynamic panel econometric techniques is that it allows short-run coefficients, speeds of adjustment and error variances to vary across countries, with cross-country homogeneity restrictions only on long-run parameters. Our results spanning 88 countries over 1960–2005 show that a positive long-run relationship between trade openness and financial development coexists with a negative short-run relationship. But when splitting the data into different income or inflation groups, this finding is observed only in relatively low-income countries or high-inflation economies.

The Output Effects of Labor Income Taxes in OECD Countries

This article considers the relationship between labor income taxes and output. An illustrative model indicates that the sign of the output effect of labor taxation policies is ambiguous and depends not only on the technology parameters but also on the taxation level. The empirical evidence for fifteen Organisation for Economic Co-operation and Development (OECD) countries over the period 1974—97 shows that the effect is heterogeneous across countries both in the short run and in the long run when considering the average tax rate. We also find a common positive and significant long-run relationship for the marginal tax rate.

The dynamics of parallel economies. Measuring the informal sector in Mexico

The existence of parallel economies that operate in the shadows of informality within most Latin American countries is widely recognized by the economic literature. However, its composition, size and effects on economic growth are still open questions. In this paper, we estimate the size and the evolution of the Mexican informal economy in the last three decades using a vector error correction model. In addition to the standard explanatory variables traditionally used in the currency demand approach, we include remittances given their relevance in the Mexican economic system. The results indicate that informality prior to the late 1980s accounted for at least two thirds of GDP, while stabilizing around one third of GDP in the last decade. Furthermore, our estimates provide evidence of a positive long-run relationship between informality and economic growth.

Development Aid and Economic Growth: A Positive Long-Run Relation

We analyze the growth impact of official development assistance to developing countries.Our approach is different from that of previous studies in two major ways. First, we disentangle the effects of two kinds of aid: developmental and non-developmental. Second,our specifications allow for the effect of aid on economic growth to occur over long periods.Our results indicate that developmental aid promotes long-run growth. The effect is significant, large and robust to different specifications and estimation techniques.

Development Aid and Economic Growth: A Positive Long-Run Relation

We analyze the growth impact of official development assistance to developing countries. Our approach is different from that of previous studies in two major ways. First, we disentangle the effects of two kinds of aid: developmental and non-developmental. Second, our specifications allow for the effect of aid on economic growth to occur over long periods. Our results indicate that developmental aid promotes long-run growth. The effect is significant, large and robust to different specifications and estimation techniques.

Does the Balassa-Samuelson Hypothesis Hold for Asian Countries? An Empirical Analysis using Panel Data Cointegration Tests

This paper tests empirically the Balassa-Samuelson (BS) hypothesis using annual data for 6 Asian countries. We apply new panel data cointegration techniques recently developed by Pedroni (2000, 2004) and we compare the results with those obtained with conventional Johansen (1995)'s time series cointegration tests. Whereas, standard time series approach turns out to be able to put in evidence a significant long-run relationship between real exchange rate and productivity differential; this relationship is strongly rejected for all countries using recent advances in the econometrics of non-stationary dynamic panel methods. Closer exminations of the three key components of the BS hypothesis enable us to identify clearly the causes of this empirical failure. We find that the absence of a positive long-run relationship between productivity differential and relative prices is the reason for this rejection.

Increasing returns to scale and the long-run Phillips curve

A growing body of empirical evidence shows that there exists a long-run positive trade-off between inflation and real macroeconomic activity. Within a New Keynesian framework, we examine how increasing returns generate a positive long-run relation between inflation and output.

Are Credit Spreads and Interest Rates Co-Integrated? Empirical Analysis in the USD Corporate Bond Market

Structural models for pricing risky debt imply a negative relationship between interest rates and credit spreads. In contrast, credit default swap pricing models assume independence between credit risk and the term structure of interest rates. So far, empirical studies have focused on first differences of time series and confirmed the negative relation implied by structural models based on Merton (1974). Nevertheless, the co-integration analysis of Morris, Neal and Rolph (1998) finds a positive long-run relation between the credit spread and the risk free interest rate which is not supported by the theoretical literature. This paper analyses the relationship between different forms of credit spreads and interest rates using the co-integration approach developed by Engle and Granger (1987). Our study is based on weekly USD corporate bond index data which is con-trolled for rating ranging from 1994 to 2006. We confirm the negative relation be-tween credit spreads and interest rates with high statistical significance. Furthermore, we find that the S&P 500 stock index and the spread between the swap curve and the Treasury yield curve can be considered as additional factors explaining the credit spread.

Are There Oil Currencies? The Real Exchange Rate of Oil Exporting Countries

This paper investigates whether the real oil price has an impact on the real exchange rates of three main oil-exporting countries: Norway, Russia and Saudi Arabia. We create our measure of the real effective exchange rates for Norway and Saudi Arabia (1980-2006) and for Russia (1995-2006), testing if real oil prices and productivity differentials against 15 OECD countries influence exchange rates. In the case of Russia it is possible to establish a positive long-run relationship between the real oil price and the real exchange rate. However, we find virtually no impact of the real oil price on the real exchange rates of Norway and Saudi Arabia. The diverse exchange rate regimes cannot help in explaining the different empirical results on the impact of oil prices across countries, which instead may be due to other policy responses, namely the accumulation of net foreign assets and their sterilisation, and specific institutional characteristics.

Capital Accumulation in Less Developed Countries: Does Stock Market Matter?

Our panel data analysis ) of a sample of 31 less developed countries) shows that the stock market capitalization as a percentage of GDP - an important indicator of stock market development - has no relationship with the growth rates of gross fixed capital formation. Our time series analysis ) of 15 countries shows that in at least 10 cases we observe no positive long-run relationship between the stock market turnover ratio and the growth of capital accumulation. Interestingly the countries experiencing the developmental function of stock market are by and large civil law origin countries with alleged poor shareholder protection.