Presence Of Unit Root Research Articles

Wage Growth and the Inflationary Process: A Reexamination

The nature of the relationship between wage growth and inflation has long been the subject of ongoing debate. The expectations-augmented Phillips-curve theory contends that the two variables are mutually causal. However, the original wage-type Phillips-curve model argues it is inflation that causes wage growth rather than vice versa. The price-markup scheme holds an opposite view and asserts that wage growth plays an independent causal role in the inflationary process. Of course, other theories (e.g., the monetarist) deny the presence of any reliable linkage between wages and prices. Researchers have also expended enormous effort attempting to investigate empirically the relationship between wage growth and inflation, but with mixed results. For example, Mehra [24] and Ashenfelter and Card [1] report results suggesting a bidirectional causality; Barth and Bennett [2] and Stein [37; 38] find causality running from prices to wages without feedback; while Shannon and Wallace [34] and Hill and Robinson [19] report results showing causality only in the reverse direction, from wages to prices. Still, Gordon [11], Bazdarich [4], Batten [3], and Mehra [27] find no causal linkage between the two variables. Clearly, such remarkably mixed evidence is unfortunate in light of the profound implications that the precise wage/price relationship may have for economic and public policy. A more recent and quite interesting study is that of Mehra [28]. Mehra employed the technique of cointegration and error-correction modelling on U.S. quarterly data for the period 1959:1-1989:3. He concluded that inflation and wage growth are cointegrated, implying that their long-run movements are correlated as the expectations-augmented Phillips-curve theory predicts. However, contrary to this theory, and in accordance with the original wage-type Phillips-curve view, Mehra argued that the inflation-wage growth long-run correlation is primarily the outcome of the former causing the latter. Mehra's model encompasses three basic variables; namely, prices (p), productivity-adjusted wages (w), and an output-gap proxy (g).' He tested each of the three variables (in logs) for the presence of unit roots, finding evidence of two unit roots in p and w, but a single unit root in g. Mehra then examined cointegration of the two variables having two unit roots (p, w). His re-

On Testing for the Stability of the Net Discount Rate

Abstract No abstract available.

Unit root and cointegration tests on the efficiency and biasedness of forward exchange rates

This paper analyzes the stationarity of spot and forward exchange rates by testing for the presence of unit roots in the autoregressive process of the exchange rate time series. The results of the unit root and cointegration tests for forward exchange rates of six major currencies are inconsistent with earlier studies by others that found the existence of unit roots but the absence of cointegration. Our results show that realized spot rates are cointegrated with past forward rates. Both Dickey-Fuller and Augmented Dickey-Fuller tests affirm the unbiased forward rate hypothesis for 30- and 90-day forward rates. The Augmented Dickey-Fuller tests on the longer term forward rate, however, reveal the existence of cointegration that leads to the rejection of the hypothesis.

Cointegration among Southeast Asian and Japanese currencies: Preliminary evidence of a Yen bloc?

Financial integration in Asia is assessed in this paper by examining the time-series stochastic behavior and cointegration in a set of five Asian currencies, the Japanese Yen (JY), Hong Kong Dollar (HK), Malaysian Ringgit (MR), Philippines Peso (PP), and the Singapore Dollar (SD), for the last eight years of the decade of the 1980s. Significant non-stationarity, deviations from normality, and the presence of unit roots were documented for each currency. Furthermore, in contrast to the findings for developed country liquid currencies, these five currencies were found to be cointegrated. These findings have important implications for understanding the expanding international role of the Japanese Yen and the nature of international financial integration in Asia as well as for developing hedging strategies for investments and cash flows denominated in these Southeast Asian currencies.

Maximum likelihood inference on cointegration and seasonal cointegration

Testing procedures for cointegration and seasonal cointegration are developed for nonstationary time series which have unit roots at seasonal frequencies as well as at the zero frequency. Using maximum likelihood inference, we estimate and test the hypothesis for the existence of cointegrating vectors at each frequency in the presence of unit roots at other seasonal frequencies. The basic finding is that several null hypotheses can be tested separately for each case of interest without any prior knowledge about the existence of cointegration relations at other frequencies. The asymptotic distribution theory is derived, and the critical values are generated by Monte Carlo simulations. The problems on the use of seasonally adjusted data are discussed, and an empirical example is illustrated by using Canadian data on unemployment and immigration rates.

Measurement Errors and Tests for Rationality

The traditional tests for rationality, the regression and volatility tests, have often rejected the hypothesis of rationality for survey data on expectations. It has been argued that these tests are not valid in the presence of unit roots and hence cointegration tests should be applied. The cointegration tests have often failed to reject the hypothesis of rationality. The present article argues that errors in variables affect tests of rationality. We use multiple sources of expectations to correct for the errors-in-variables bias but find that the hypothesis of rationality is rejected even after this correction. The article uses survey data on interest rates, stock prices, and exchange rates.

Bayesian skepticism on unit root econometrics

This paper examines several grounds for doubting the value of much of the special attention recently devoted to unit root econometrics. Unit root hypotheses are less well connected to economic theory than is often suggested or assumed; distribution theory for tests of other hypotheses in models containing unit roots are less often affected by the presence of unit roots than has been widely recognized; and the Bayesian inferential theory for dynamic models is largely unaffected by the presence of unit roots. The paper displays an example to show that when Bayesian probability statements and classical marginal significance levels diverge as they do for unit root models, the marginal significance levels are misleading. The paper shows how to carry out Bayesian inference when discrete weight is given to the unit root null hypothesis in a univariate model.

Unit Roots Tests: Evidence from the Foreign Exchange Futures Market

In this paper, tests are conducted for the presence of unit roots in the autoregression representation of foreign exchange currency futures price series. The results obtained from five different currency futures over the 1977–1983 period suggestthat foreign currency futures rates have autoregressive representations with a singleunit root (i.e., borderline nonstationarity). In view of this result, it appears thatthe process generating the natural logarithm of foreign currency futures rates may well be approximated by random walks.

Studies of Economic Interdependence by State Space Modeling of Time Series: US-Japan Example

This paper proposes a new way of studying interdependence of countries by building models for selected macroeconomic time series of the coun tries involved, by a state space model which incorporates moving average compo nents in addition to autoregressive ones. The singular value decomposition is performed of the covariance matrix between the data and future realization of the data vector. A crucial step is the choice of a particular coordinate system which resolved indentifiability question and leads to estimates of the model system matrices which enjoy certain nesting or orthogonality properties. The estimates are consistent even when the state vector dimension is unspecified. The paper then discusses the possible presence of unit roots in the time series and develops a canonical representation of time series containing unit root components. Unit roots are removed by prior detrending in this paper. (The author has since developed a two-step procedure that eliminates the need for this prior detrending in AOKI (1 987a)). The method is then applied to study interaction of the industrial produc tion indices and ex ante real interest rates in the USA and Japan. Etudes de l'interdependance economique par la modelisation espace-etat: I'exemple des Etats Unis et du Japon