Long Run Macroeconomic Relations in the Global Economy

Stéphane Dées · Sean Holly · M. Hashem Pesaran · L. Vanessa Smith

135 citations0/0 files storedEconomics

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Market Dynamics and Volatility

Abstract

Abstract This paper presents tests of long run macroeconomic relations involving interest rates, equity, prices and exchange rates suggested by arbitrage in financial and goods markets. It uses the global vector autoregressive (GVAR) model to test for long run restrictions in each country/region conditioning on the rest of the world. Bootstrapping is used to compute both the empirical distribution of the impulse responses and the log-likelihood ratio statistic for over-identifying restrictions. The paper also examines the speed with which adjustments to the long run relations take place via the persistence profiles. It finds strong evidence in favour of a long run version of uncovered interest parity and to a lesser extent the Fisher equation across a number of countries, but the test results for the purchasing power parity relation are much weaker. Also the transmission of shocks and subsequent adjustments in financial markets are much faster than those in goods markets.

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References

1980Macroeconomics and Reality 1998Generalized impulse response analysis in linear multivariate models 2012The Econometrics of Financial Markets 1996Impulse response analysis in nonlinear multivariate models 1997The Econometrics of Financial Markets 2000The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?2005Monetary Policy and Exchange Rate Volatility in a Small Open Economy 2002Monetary Policy and Exchange Rate Volatility in a Small Open Economy

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