Structural Cointegration Research Articles

Korumasız Faiz Oranı Paritesinin Geçerliliği: Gelişmiş Ülkelerden Yeni Kanıtlar

Uluslararası piyasalarda artan küreselleşme ile döviz kurları ile faiz oranları arasındaki etkileşimlerin önemi artmıştır. Özellikle finansal piyasalarda sermaye hareketliliğinin davranışlarının faiz oranlarına ve ilgili ülkeler arasındaki döviz kuruna oldukça bağımlı olduğu göz önüne alındığında, para otoritelerinin ilgili makroekonomik göstergeler arasındaki ilişkileri gözeterek politika uygulamaları önem kazanmaktadır. Bu çalışmada, seçilmiş 12 gelişmiş ülkenin 2002:Q1-2019:Q2 dönemi çeyreklik verileri aracılığıyla korumasız faiz oranı paritesinin geçerliliği sınanmıştır. Yatay kesit bağımlılığı altında, dinamik panel veri analizi yöntemlerinin tercih edildiği çalışmada, paneli oluşturan ülke ekonomilerinde faiz oranı ve döviz kuru arasındaki eşbütünleşme ilişkisi Westerlund ve Edgerton tarafından önerilen yapısal kırılmalı panel eşbütünleşme testi aracılığıyla test edilmiştir. Bulgular, eşbütünleşme ilişkisinin varlığını göstermektedir. Diğer taraftan faiz oranı ve döviz kuru değişkenleri için, Emirmahmutoğlu ve Köse tarafından önerilen nedensellik sonuçları ise, döviz kurundan faiz oranına doğru tek yönlü nedenselliğin varlığına işaret etmektedir. Bu sonuç, para otoritelerinin sadece faiz oranları ile finansal piyasaları düzenleyemeyeceği göstermektedir. Dolayısıyla, faiz oranlarının nedeni olan döviz kurlarının kontrolünün önemli hale geldiği anlaşılmaktadır.

Environmental pollution of China to foreign investors: detrimental or beneficial?

This study investigates the dynamic linkage among foreign direct investment, energy consumption, and environmental pollution of China spanning from 1990 to 2014. Despite the extant literature on the FDI-energy-growth-environmental pollution nexus, most of the conclusion seems inconsistent. Hence, this study utilized recent econometric techniques such as the dynamic ordinary least square (DOLS), autoregressive distributed lag (ARDL) bounds test approach, Gregory and Hansen structural cointegration, and the bootstrap Granger causality. The study also disaggregated energy consumption into various sources to identify their respective distinct impact on the environment. Our study confirmed the presence of the EKC curve for China in a quadratic equation applying the DOLS. The result of the bootstrapped Granger causality confirmed the presence of a unidirectional Granger causality running from CO2 emission to economic growth and export; non-renewable energy to economic growth, export to economic growth, and renewable energy; and urbanization to economic growth. Moreover, our study recognized the presence of a bi-directional connection between FDI and economic growth. Our study highly recommends that China modify its energy mix by incorporating more renewable energy resources such as hydro, wind, geothermal. Additionally, the regulatory bodies should strictly implement improved energy efficiency in the various sectors that complement total proper urban land usage as the urban population to total population significantly impelled an upsurge in environmental deterioration in China.

A model selection approach to jointly testing for structural breaks and cointegration with application to the Eurocurrency interest rates market

All tests involving both structural breaks and cointegration are parametric. As a complement to the classical hypothesis testing for empirical researchers, we suggest the use of a one-step model selection approach to simultaneously specifying lag orders, cointegration ranks, and structural breaks. The performances of the four popular information criteria along with a LM-based parametric test are shown in extensive simulation studies. Applying the approach to study linkages in the Eurocurrency interest rates market, we find that six major short-term rates were subject to a structural break and the cointegration rank also changed following the break.

Impact of High-Skilled Migration to the UK on the Source Countries (EU8) Economies

The majority of studies into the economic effects of high-skilled migration focus on aggregate impact on the economic output in the countries of destination. The economic impact of migration of the highly qualified on the economies of the countries of their origin has been examined less. This qualitative research aims to address that gap by identifying the economic effects of high-skilled migration on Central and Eastern Europe, the region which faces many long-term challenges to its economic development. We use the available data from the UK International Passenger Survey for the 2004-2016 period to test whether the outflow of highly qualified workers from the EU8 countries to the UK is detrimental or beneficial for the growth of sending economies in the short and long term. In order to test these hypotheses, econometric time series analysis methods of structural vector autoregression and cointegration were applied. Our results have shown a positive short-term effect of brain outflow on regions’ GDP and wage growth as well as unemployment; on the other hand, we presented empirical evidence in support of the hypothesis of the negative long-term effect of high-skilled migration on EU8 countries’ GDP and wage growth as well as unemployment. These results are fairly robust to imply that a negative view on high-skilled migration from EU8 is broadly consistent with the previous findings of “harmful brain drain” scholars.

Linear and Nonlinear Causality between Energy Consumption and Economic Growth: The Case of Mexico 1965–2014

This paper analyzes the causal link between aggregated and disaggregated levels of energy consumption and economic growth in Mexico between 1965 and 2014, with the presence of structural breaks stemming from the series. To that end, unit root with structural breaks, cointegration, and linear and nonlinear causality tests are employed. The results show that there is a long-run relationship between production, capital, labor, and energy, and linear causal links from total and disaggregated energy consumption to economic growth. A nonlinear causality also exists from energy consumption, the transport sector, capital, and labor to output. These results support the growth hypothesis, which maintains that energy is an important input factor for economic activity and that energy conservation policies impact the economic growth in Mexico.

Shift in demand elasticities, road energy forecast and the persistence profile of shocks

Abstract We forecast demand and investigate the shift in price and income elasticities and the persistent profile of shocks for diesel and gasoline fuels in the road transport sector in Ghana using annual data from 1971 to 2011. First, we find that gasoline and diesel demand are both price inelastic in the short- run, but the income elasticity for the former is inelastic and elastic for the latter. There is evidence of a shift in the long-run price and income elasticities after the eighties. We find that these elasticities differ between diesel and gasoline. We show that government decision to withdraw fuel subsidies will increase the energy efficiency gap in the diesel sector more than the gasoline sector. Using the Structural Cointegration VAR, we also show that government intervention in pricing of petroleum products in the road sector seems to be politically and not economically driven. Further, shocks are more persistent for diesel than gasoline. Last, road diesel and gasoline consumption are expected to increase but slow down between 2020 and 2030 with a possible dieselization of the economy. These results have important implications for government fuel tax policy and investment commitment in the road sector.

Transmission of US monetary policy into the Canadian economy: A structural cointegration analysis

Abstract This paper estimates a two-country model comprising structural cointegrated models of Canada and the US. Using persistence profile analysis, we find that the Term Structure and a modified Fisher equation are maintained in the US model, and, the Term Structure, Fisher equation and Interest Rate Parity are maintained in the Canadian model. Then we use the model to examine the transmission of US monetary policy into the Canadian economy. The results show that the responses of the Canadian macro variables to the US monetary policy shock are very similar to the responses of the US macro variables to the same shock: after a contractionary US monetary policy shock, output falls quickly and shows a U-shaped response, inflation falls with a delay, short-term interest rate jumps and then gradually declines and long-term interest rate increases for one year and then gradually declines. Our results show that interest rate-path-through is the major mechanism by which US monetary policy shocks are transmitted into the Canadian economy.

Foreign Direct Investment, Financial Development, and Economic Growth: A Cointegration Model

This paper examines causalities among foreign direct investment (FDI), economic growth (GTH), and financial development proxied by both equity market size (EQM) and bank credit to private sectors (BANK). We use a structural cointegration model with a vector error correction (VEC) mechanism to test for the short-term dynamics of the model. The results show that there is a reinforcing causal relationship between FDI and EQM, and between EQM and GTH in the short term, and that these variables cointegrate in the long term. As far as practical implications are concerned, the results reinforce that developed financial markets are an essential precondition for the positive impact of FDI on economic growth, reflecting host countries’ ability to exploit FDI more efficiently. Moreover, the paper provides further substance for the notion that a country with a well-developed financial market gains significantly from FDI inflow.

Cointegration and Structural Breaks in the EU Sovereign Debt Crisis

First signs of a sovereign debt crisis spread among financial players in the late 2009 as a result of the growing private and government debt levels worldwide. Late 2010, Trichet (then President of the ECB) stated that the sovereign debt crisis in Europe had become systemic. In an established crisis context, it was searched for evidence of structural breaks and cointegration between interest rates and stock market prices. A 13 year time-window was used in six European markets under stress. The results identified significant structural breaks at the end of 2010 and consistently rejected the null hypothesis of no cointegration.

The relationships between Shanghai stock market and CNY/USD exchange rate: New evidence based on cross-correlation analysis, structural cointegration and nonlinear causality test

This paper explores the co-movement of Shanghai stock market and China Yuan (CNY) exchange rates. First, we find that stock price and exchange rate are significantly cross-correlated. Second, employing a cointegration test allowing for a structural break, we find that the Shanghai Composite Index (SCI) is not cointegrated with the exchange rate of CNY/USD. The so-called “cointegration” found in previous studies is just caused by the shock of the recent financial crisis. Third, using linear and nonlinear Granger causality tests, we find no causality between stock prices and exchange rates during the period before the recent financial crisis. After the financial crisis, a unidirectional causality behavior running from exchange rates to stock index is present.

A structural analysis of price discovery measures

We analyze the structural determinants of two widely used measures of price discovery between multiple markets that trade closely related securities. Using a structural cointegration model, we show that both the information share (IS) and component share (CS) measures account for the relative avoidance of noise trading and liquidity shocks, but that only the IS can provide information on the relative informativeness of individual markets. In particular, the IS of one market is higher if it incorporates more new information and/or impounds less liquidity shocks. Use of the CS in conjunction with the IS can help sort out the confounding effects of the two types of shocks. Furthermore, we find that the IS only accounts for the immediate (one-period) responses of market prices to the news innovation, which implies that the IS estimates based on high sampling frequencies may be distorted by transitory frictions and may miss important price discovery dynamics.

RESPON KEBIJAKAN MONETER YANG OPTIMAL DI INDONESIA: The State-Contingent Rule?

By developing a long-run macro structural model, The Structural Cointegrating Vector Autoregression (VAR), the optimality principle of monetary policy response in Indonesia is formulated. It accommodates not only long-run policy response and short-run dynamic errorcorrection mechanism, but also specific shocks emerged due to structural changes in the economy. In that context, the generated policy response basically reflects the optimal response of a “state-contingent rule”, different from common simple policy rules, such as Taylor rule and McCallum rule. This study captures several important aspects related to the implementation of “state-contingent rule” as an optimal monetary policy in Indonesia, namely: (i) the superiority of interest rate as a policy variable, or an operational target, against monetary base, (ii) the identification of monetary policy lag which is estimated averagely one-and-a half year, and (iii) the sub optimality of central bank monetary policy response, attributed by an over tight or loose policy response.JEL Classification: C32, E52Keywords: Kebijakan Moneter di Indonesia, Respon Kebijakan Moneter, Structural Cointegration Vector Autoregression(VAR).

A Structural Analysis of Price Discovery Measures

We analyze the structural determinants of two widely used measures of price discovery between multiple markets that trade closely-related securities. Using a structural cointegration model, we show that both the information share (IS) and component share (CS) measures account for the relative avoidance of noise trading and liquidity shocks, but that only the IS can provide information on the relative informativeness of individual markets. In particular, the IS of one market is higher if it incorporates more new information and/or impounds less liquidity shocks. Use of the CS in conjunction with the IS can help sort out the confounding effects of the two types of shocks. Furthermore, we find that the IS only accounts for the immediate (one-period) responses of market prices to the news innovation which implies that the IS estimates based on high sampling frequencies may be distorted by transitory frictions and may miss important price discovery dynamics.

ANALISIS KEBIJAKAN MONETER DALAM MODEL MAKROEKONOMETRIK STRUKTURAL JANGKA PANJANG: STRUCTURAL COINTEGRATING VECTOR AUTOREGRESSION

The paper analyzes the monetary policy behavior by developing a long-run structural macroeconometric model; the Structural Cointegrating Vector Autoregression. The model is empirically proposed by Garratt et. al. (1998 and 1999) and adopted to suit the indonesian case.The result shows that the model perform well in explaining the monetary policy behavior in Indonesia. However, due to the limitation of data, and a re-orientation of monetary policy, we should carefully examine and interpreting the magnitude of parameters used on the model.Keywords: Kebijakan Moneter di Indonesia, Model Makro Struktural Jangka Panjang, Structural Cointegration Vector Autoregression (VAR).JEL Classification: C32, C51, E52, E58

Public-Private Investment Linkage in Pakistan

The link between public and private investment is investigated using annual data for the period 1964–65 to 2004–05. The estimates based on the structural cointegration approach indicate that both are cointegrated and public investment crowds in private investment. The study then used the McCabe et al. (2003) test to identify whether the existing cointegration vector is stationary or heteroscedastic. The findings of the analysis suggest that private investment can be enhanced by increasing public expenditure in infrastructure. The results of this study support the complementarity hypothesis, which states that stock of public capital crowds in private capital accumulation via increasing the return to private capital in private production technology.

Money, barter, and inflation in Russia

This paper analyzes relationships among money, barter, and inflation in Russia during the transition period. Following the development of a theoretical framework that introduces barter into a standard macroeconomic model for a small, open economy, we estimate the model using structural cointegration and vector error-correction methods. Our findings suggest that Russian barter resulted partly from output losses, and, to a lesser extent, from the reduction in real money balances. We also find that increases in barter are affected by inefficiencies in the banking sector. Our results imply that increased barter contributed to generating persistent inflation and output decline in Russia. Journal of Comparative Economics32 (2) (2004) 297–314.

Money, barter, and inflation in Russia

This paper analyzes relationships among money, barter, and inflation in Russia during the transition period. Following the development of a theoretical framework that introduces barter into a standard macroeconomic model for a small, open economy, we estimate the model using structural cointegration and vector error-correction methods. Our findings suggest that Russian barter resulted partly from output losses, and, to a lesser extent, from the reduction in real money balances. We also find that increases in barter are affected by inefficiencies in the banking sector. Our results imply that increased barter contributed to generating persistent inflation and output decline in Russia. Journal of Comparative Economics 32 (2) (2004) 297–314.

A Note on the Relation between Government Expenditure and Receipts in Italy: A Quarterly Analysis

A precise knowledge of the relation between government expenditure and revenues may be useful to control budget deficits because, if there is interdependence, raising taxes to reduce deficits may lead directly to more spending. An effective manipulation of central government spending and tax revenues requires information on the direction of causality between these economic variables. The purpose of this paper is to investigate the relationship between government expenditure and receipts based on quarterly data, using the structural cointegration approach of Pesaran and Pesaran [1997]. In the results presented below, the structural cointegration approach provides evidence of a long and short-run equilibrium between government spending and receipts, supporting the assumption that the Italian Government’s expenditure is a sort of automatic stabiliser as opposed to Wagner’s Law.

Foreign direct investment and growth in India: a cointegration approach

The two-way link between foreign direct investment and growth for India is explored using a structural cointegration model with vector error correction mechanism. The existence of two cointegrating vectors between GDP, FDI, the unit labour cost and the share of import duty in tax revenue is found, which captures the long run relationship between FDI and GDP. A parsimonious vector error correction model (VECM) is then estimated to find the short run dynamics of FDI and growth. Our VECM model reveals three important features: (a) GDP in India is not Granger caused by FDI; the causality runs more from GDP to FDI; (b) trade liberalization policy of the Indian government had some positive short run impact on the FDI flow; and (c) FDI tends to lower the unit labour cost suggesting that FDI in India is labour displacing.

Two stage least squares estimation in structural cointegration models

This paper considers single-equation estimation of simultaneous equation models with integrated processes. The aim of the paper is to investigate asymptotic and small sample properties of some estimators in this framework. We deal with two groups of estimators: such that originally were designated for reduced form estimation and such for simultaneous equation models. In the first group we deal with Least Squares and Fully Modified Least Squares. The second group comprises Two Stage Least Squares and two modifications of it. The asymptotic analysis in section 2 shows that it is true that all estimators are super-consistent in this context but in principle, only the methods of the second group enable valid inference. Section 3 presents the results of a simulation study which is designed for specific problems of simultaneous equation models.