This paper estimates the degree of persistence of 16 long-horizon real exchange rates relative to... more This paper estimates the degree of persistence of 16 long-horizon real exchange rates relative to the US dollar. We use nonparametric operational algorithms by El-Gamal and Ryu (2006) for general nonlinear models based on two statistical notions: the short memory in mean (SMM) and the short memory in distribution (SMD). We found substantially shorter maximum half-life (MHL) estimates than the counterpart from linear models. Our results are robust to the choice of bandwidth with a few exceptions.
This paper seeks empirical evidence of nonlinear mean-reversion in relative national stock price ... more This paper seeks empirical evidence of nonlinear mean-reversion in relative national stock price indices for Emerging Asian countries. It is well known that conventional linear unit root tests suffer from low power against the stationary nonlinear alternative. Implementing the nonlinear unit root tests proposed by Kapetanios, et al. (2003) and Cerrato, et al. (2009) for the relative stock prices of Emerging Asian markets, we find strong evidence of nonlinear mean reversion, whereas linear tests fail to reject the unit root null for most cases. We also report some evidence that stock markets in China and Taiwan are highly localized.
Exchange rate volatility determines the overall dynamics of pass-through effects and associated a... more Exchange rate volatility determines the overall dynamics of pass-through effects and associated absorption capability of exchange rate. Ability of exchange rates to transmit external (price) shocks to the national economy represents one of the most discussed areas relating to the current stage of the monetary integration in the European single market. The problem is even more crucial when examining crisis related redistributive effects. In the paper we analyse exchange rate pass-through to consumer prices in the European transition economies. We estimate VAR model to investigate (1) responsiveness of exchange rate to the exogenous price shock to examine the dynamics (volatility) in the exchange rate leading path followed by the unexpected oil price shock and (2) effect of the unexpected exchange rate shift to consumer prices to examine its distribution to the internal pricing chain. Our results suggest that there are different patterns of exchange rate pass-through to domestic prices according to the baseline period as well as the exchange rate regime diversity.
Cheung et al. (2004) use a vector error correction model that allows different speeds of converge... more Cheung et al. (2004) use a vector error correction model that allows different speeds of convergence for nominal exchange rates and relative prices toward PPP. With the current float monthly data for five countries, they argue that the sluggish PPP reversion is primarily driven by nominal exchange rate adjustment rather than price adjustment, which is at odds with the conventional sticky-price models. Major findings of this paper are twofold. First, we show that it may be inappropriate to use short-horizon high frequency data in vector error correction models, even when both the nominal exchange rate and the relative price are not weakly exogenous. Second, using a long-horizon annual data set for 11 countries vis-à-vis the US, we find a significantly important role of relative prices in real exchange rate dynamics.
The least squares (LS) estimator suffers from significant downward bias in autoregressive models ... more The least squares (LS) estimator suffers from significant downward bias in autoregressive models that include an intercept. By construction, the LS estimator yields the best in-sample fit among a class of linear estimators notwithstanding its bias. Then, why do we need to correct for the bias? To answer this question, we evaluate the usefulness of the two popular bias correction methods, proposed by Hansen (1999) and So and Shin (1999), by comparing their out-of-sample forecast performances with that of the LS estimator. We find that bias-corrected estimators overall outperform the LS estimator. Especially, Hansen's grid bootstrap estimator combined with a rolling window method performs the best.
This note discusses a pitfall of using the generalized impulse response function (GIRF) in vector... more This note discusses a pitfall of using the generalized impulse response function (GIRF) in vector autoregressive (VAR) models (Pesaran and Shin, 1998). The GIRF is general because it is invariant to the ordering of the variables in the VAR. The GIRF, in fact, is extreme because it yields a set of response functions that are based on extreme identifying assumptions that contradict each other, unless the covariance matrix is diagonal. With a help of empirical examples, the present note demonstrates that the GIRF may yield quite misleading economic inferences.
The least squares (LS) estimator suffers from significant downward bias in autoregressive models ... more The least squares (LS) estimator suffers from significant downward bias in autoregressive models that include an intercept. By construction, the LS estimator yields the best in-sample fit among a class of linear estimators notwithstanding its bias. Then, why do we need to correct for the bias? To answer this question, we evaluate the usefulness of the two popular bias correction methods, proposed by Hansen (1999) and So and Shin (1999), by comparing their out-of-sample forecast performances with that of the LS estimator. We find that bias-corrected estimators overall outperform the LS estimator. Especially, Hansen's grid bootstrap estimator combined with a rolling window method performs the best.
This paper evaluates the speed of convergence across national stock markets employing a nonlinear... more This paper evaluates the speed of convergence across national stock markets employing a nonlinear, nonparametric stochastic model of the relative stock price. To estimate the persistence of the relative stock price, we employ an operational algorithm that is based on two statistical notions: the short memory in mean (SMM) and the short memory in distribution (SMD). Using MSCI stock price indices of the G7 countries, we obtain strong empirical evidence of convergence of national stock prices in France, Germany, and the UK vis-à-vis the US index. Also, we obtain much faster convergence rates from our nonlinear models in comparison with those from linear alternatives. On the contrary, our results imply very limited evidence of convergence for Canada, Italy, and Japan. Similarly weak evidence of convergence was obtained from non-G7 developed countries. Our simulation exercise for portfolio switching strategies overall confirms the validity of empirical findings in the present paper.
This note discusses a pitfall of using the generalized impulse response function (GIRF) in vector... more This note discusses a pitfall of using the generalized impulse response function (GIRF) in vector autoregressive (VAR) models (Pesaran and Shin, 1998). The GIRF is general because it is invariant to the ordering of the variables in the VAR. The GIRF, in fact, is extreme because it yields a set of response functions that are based on extreme identifying assumptions that contradict each other, unless the covariance matrix is diagonal. With a help of empirical examples, the present note demonstrates that the GIRF may yield quite misleading economic inferences. n Resumen: Esta nota analiza la limitación de utilizar la función generalizada de impulso-respuesta (FGIR) de los modelos autoregresivos VAR (Pesaran y Shin, 1998). El FGIR es invariante al orden del rezago de las variables asociadas al modelo VAR. De hecho, el FGIR produce un conjunto de funciones respuestas con base a supuestos de identificación extremos que se contradicen entre ellos, a menos que la matriz de covarianza sea diagonal. Con la ayuda de ejemplos empíricos, la presente nota demuestra que el FGIR puede generar inferencias incorrectas.
This paper seeks empirical evidence of nonlinear mean-reversion in relative national stock price ... more This paper seeks empirical evidence of nonlinear mean-reversion in relative national stock price indices for Emerging Asian countries. It is well known that conventional linear unit root tests suffer from low power against the stationary nonlinear alternative. Implementing the nonlinear unit root tests proposed by Kapetanios, et al. (2003) and Cerrato, et al. (2009) for the relative stock prices of Emerging Asian markets, we find strong evidence of nonlinear mean reversion, whereas linear tests fail to reject the unit root null for most cases. We also report some evidence that stock markets in China and Taiwan are highly localized.
A number of researchers have found that the rate of exchange rate pass-through (ERPT) to domestic... more A number of researchers have found that the rate of exchange rate pass-through (ERPT) to domestic prices has declined substantially over the last few decades. We revisit this claim of a shrinking exchange rate e¤ect on the Consumer Price Index (CPI) in a vector autoregressive (VAR) model for US macroeconomic data under the current ‡oating exchange rate regime. Our VAR approach nests the conventional single equation method and reveals statistically signi…cant evidence of ERPT to the CPI only during later observations, sharply contrasting with previous …ndings. After con…rming structural breaks in ERPT via statistical tests by Hansen (2001) and Qu and Perron (2007), we seek the source with disaggregated level CPIs, and pin down a key role of energy prices. US energy imports increased from the 1990s until the recent recession. This market changes magnify the e¤ects of the exchange rate shocks on domestic energy prices, resulting in greater responses of the total CPI via the energy price channel.
This paper empirically investigates the determinants of key benchmark interest rates in China usi... more This paper empirically investigates the determinants of key benchmark interest rates in China using an array of constrained ordered probit models for quarterly frequency data from 1987 to 2013. Specifically, we estimate the behavioral equation of the People's Bank of China that models their decision-making process for revisions of the benchmark deposit rate and the lending rate. Our findings imply that the PBC's policy decisions are better understood as responses to changes in inflation and money growth, while output gaps and the exchange rate play negligible roles. We also implement in-sample fit analyses and out-of-sample forecast exercises. These tests show robust and reasonably good performances of our models in understanding dynamics of these benchmark interest rates.
In the Kehoe and Midrigan (2007) model, the persistence parameter of the real exchange rate is cl... more In the Kehoe and Midrigan (2007) model, the persistence parameter of the real exchange rate is closely related to the measure of price stickiness in the Calvo-pricing model. When we employ this view, Rogoff's (1996) 3 to 5 year consensus half-life implies that firms update their prices every 18 to 30 quarters on average. This is at odds with most estimates from U.S. aggregate data when single equation methods are applied to the New Keynesian Phillips Curve (NKPC), or when system methods are applied to Dynamic Stochastic General Equilibrium (DSGE) models that include the NKPC. It is well known, however, that there is a large degree of uncertainty around the consensus half-life of the real exchange rate. To obtain a more efficient estimator, this paper develops a system method that combines the Taylor rule and a standard exchange rate model to estimate half-lives. We use a median unbiased estimator for the system method with nonparametric bootstrap confidence intervals, and compare the results with those from the single equation method typically used in the literature. Applying the method to the real exchange rates of 18 developed countries against the U.S. dollar, we find that most of the half-life estimates from the single equation method fall in the range of 3 to 5 years with wide confidence intervals that extend to positive infinity. In contrast, the system method yields median-unbiased estimates that are typically shorter than one year with much sharper 95% confidence intervals, most of which range from 3 quarters to 5 years. These median unbiased estimates and the lower bound of the confidence intervals for the half-lives of real exchange rates are consistent with most estimates of price stickiness using aggregate U.S. data for the NKPC and DSGE models.
International Review of Economics & Finance, Sep 1, 2015
We estimate dynamic conditional correlations of financial asset returns across countries by an ar... more We estimate dynamic conditional correlations of financial asset returns across countries by an array of multivariate GARCH models and analyze spillover effects of the recent US financial crisis on 5 emerging Asian countries. We find a symptom of financial contagion around the collapse of Lehman Brothers in September 2008. There appears to be a regime shift to substantially higher conditional correlations that persisted for a fairly short-period of time. We also propose a novel approach that allows simultaneous estimations of the conditional correlation coefficient and the effects of its determining factors over time, which can be used to identify channels of spillovers. We find the dominant role of foreign investment for the conditional correlations in international equity markets. The dollar Libor-OIS spread, the sovereign CDS premium, and foreign investment are found to play significant roles in foreign exchange markets.
This paper empirically investigates potential effects of economic recessions on consumers' decisi... more This paper empirically investigates potential effects of economic recessions on consumers' decision-making process for leisure activities using the Consumer Expenditure Survey data during the Great Recession. We employ the Probit model to study how changes in income affect the likelihood of making nonzero expenditures on entertainment activities. Recognizing the presence of a high degree of censoring, we employ the Tobit model to assess the income effect on recreational activities to avoid bias in the least squares estimator for the latent coefficients. Income coefficient estimates are significantly positive in all years we consider, confirming that leisure is a normal good. However, we observe statistically significant decreases in the income coefficient during recession years in two out of three categories of leisure activities. That is, the responsiveness of consumption to income changes decreases during recession years, which implies a sluggish adjustment in leisure expenditures when economic distress is elevated.
This paper studies dynamic adjustments of 49 world commodity prices in response to innovations in... more This paper studies dynamic adjustments of 49 world commodity prices in response to innovations in the nominal exchange rate and the world real GDP. After we estimate the dynamic elasticity of the prices with respect to these shocks, we obtain the kernel density of our estimates to establish stylized facts on the adjustment process of the commodity price toward a new equilibrium path. Our empirical …ndings imply, on average, that the law of one price holds in the long-run, whereas the substantial degree of short-run price rigidity was observed in response to the nominal exchange rate shock. The real GDP shock tends to generate substantial price ‡uctuations in the short-run because adjustments of the supply can be limited, but have much weaker e¤ects in the long-run as the supply eventually counterbalances the increase in the demand. Overall, we report persistent long-lasting e¤ects of the nominal exchange rate shock on commodity prices relative to those of the real GDP shock.
This paper estimates the degree of persistence of 16 long-horizon real exchange rates relative to... more This paper estimates the degree of persistence of 16 long-horizon real exchange rates relative to the US dollar. We use nonparametric operational algorithms by El-Gamal and Ryu (2006) for general nonlinear models based on two statistical notions: the short memory in mean (SMM) and the short memory in distribution (SMD). We found substantially shorter maximum half-life (MHL) estimates than the counterpart from linear models. Our results are robust to the choice of bandwidth with a few exceptions.
This paper seeks empirical evidence of nonlinear mean-reversion in relative national stock price ... more This paper seeks empirical evidence of nonlinear mean-reversion in relative national stock price indices for Emerging Asian countries. It is well known that conventional linear unit root tests suffer from low power against the stationary nonlinear alternative. Implementing the nonlinear unit root tests proposed by Kapetanios, et al. (2003) and Cerrato, et al. (2009) for the relative stock prices of Emerging Asian markets, we find strong evidence of nonlinear mean reversion, whereas linear tests fail to reject the unit root null for most cases. We also report some evidence that stock markets in China and Taiwan are highly localized.
Exchange rate volatility determines the overall dynamics of pass-through effects and associated a... more Exchange rate volatility determines the overall dynamics of pass-through effects and associated absorption capability of exchange rate. Ability of exchange rates to transmit external (price) shocks to the national economy represents one of the most discussed areas relating to the current stage of the monetary integration in the European single market. The problem is even more crucial when examining crisis related redistributive effects. In the paper we analyse exchange rate pass-through to consumer prices in the European transition economies. We estimate VAR model to investigate (1) responsiveness of exchange rate to the exogenous price shock to examine the dynamics (volatility) in the exchange rate leading path followed by the unexpected oil price shock and (2) effect of the unexpected exchange rate shift to consumer prices to examine its distribution to the internal pricing chain. Our results suggest that there are different patterns of exchange rate pass-through to domestic prices according to the baseline period as well as the exchange rate regime diversity.
Cheung et al. (2004) use a vector error correction model that allows different speeds of converge... more Cheung et al. (2004) use a vector error correction model that allows different speeds of convergence for nominal exchange rates and relative prices toward PPP. With the current float monthly data for five countries, they argue that the sluggish PPP reversion is primarily driven by nominal exchange rate adjustment rather than price adjustment, which is at odds with the conventional sticky-price models. Major findings of this paper are twofold. First, we show that it may be inappropriate to use short-horizon high frequency data in vector error correction models, even when both the nominal exchange rate and the relative price are not weakly exogenous. Second, using a long-horizon annual data set for 11 countries vis-à-vis the US, we find a significantly important role of relative prices in real exchange rate dynamics.
The least squares (LS) estimator suffers from significant downward bias in autoregressive models ... more The least squares (LS) estimator suffers from significant downward bias in autoregressive models that include an intercept. By construction, the LS estimator yields the best in-sample fit among a class of linear estimators notwithstanding its bias. Then, why do we need to correct for the bias? To answer this question, we evaluate the usefulness of the two popular bias correction methods, proposed by Hansen (1999) and So and Shin (1999), by comparing their out-of-sample forecast performances with that of the LS estimator. We find that bias-corrected estimators overall outperform the LS estimator. Especially, Hansen's grid bootstrap estimator combined with a rolling window method performs the best.
This note discusses a pitfall of using the generalized impulse response function (GIRF) in vector... more This note discusses a pitfall of using the generalized impulse response function (GIRF) in vector autoregressive (VAR) models (Pesaran and Shin, 1998). The GIRF is general because it is invariant to the ordering of the variables in the VAR. The GIRF, in fact, is extreme because it yields a set of response functions that are based on extreme identifying assumptions that contradict each other, unless the covariance matrix is diagonal. With a help of empirical examples, the present note demonstrates that the GIRF may yield quite misleading economic inferences.
The least squares (LS) estimator suffers from significant downward bias in autoregressive models ... more The least squares (LS) estimator suffers from significant downward bias in autoregressive models that include an intercept. By construction, the LS estimator yields the best in-sample fit among a class of linear estimators notwithstanding its bias. Then, why do we need to correct for the bias? To answer this question, we evaluate the usefulness of the two popular bias correction methods, proposed by Hansen (1999) and So and Shin (1999), by comparing their out-of-sample forecast performances with that of the LS estimator. We find that bias-corrected estimators overall outperform the LS estimator. Especially, Hansen's grid bootstrap estimator combined with a rolling window method performs the best.
This paper evaluates the speed of convergence across national stock markets employing a nonlinear... more This paper evaluates the speed of convergence across national stock markets employing a nonlinear, nonparametric stochastic model of the relative stock price. To estimate the persistence of the relative stock price, we employ an operational algorithm that is based on two statistical notions: the short memory in mean (SMM) and the short memory in distribution (SMD). Using MSCI stock price indices of the G7 countries, we obtain strong empirical evidence of convergence of national stock prices in France, Germany, and the UK vis-à-vis the US index. Also, we obtain much faster convergence rates from our nonlinear models in comparison with those from linear alternatives. On the contrary, our results imply very limited evidence of convergence for Canada, Italy, and Japan. Similarly weak evidence of convergence was obtained from non-G7 developed countries. Our simulation exercise for portfolio switching strategies overall confirms the validity of empirical findings in the present paper.
This note discusses a pitfall of using the generalized impulse response function (GIRF) in vector... more This note discusses a pitfall of using the generalized impulse response function (GIRF) in vector autoregressive (VAR) models (Pesaran and Shin, 1998). The GIRF is general because it is invariant to the ordering of the variables in the VAR. The GIRF, in fact, is extreme because it yields a set of response functions that are based on extreme identifying assumptions that contradict each other, unless the covariance matrix is diagonal. With a help of empirical examples, the present note demonstrates that the GIRF may yield quite misleading economic inferences. n Resumen: Esta nota analiza la limitación de utilizar la función generalizada de impulso-respuesta (FGIR) de los modelos autoregresivos VAR (Pesaran y Shin, 1998). El FGIR es invariante al orden del rezago de las variables asociadas al modelo VAR. De hecho, el FGIR produce un conjunto de funciones respuestas con base a supuestos de identificación extremos que se contradicen entre ellos, a menos que la matriz de covarianza sea diagonal. Con la ayuda de ejemplos empíricos, la presente nota demuestra que el FGIR puede generar inferencias incorrectas.
This paper seeks empirical evidence of nonlinear mean-reversion in relative national stock price ... more This paper seeks empirical evidence of nonlinear mean-reversion in relative national stock price indices for Emerging Asian countries. It is well known that conventional linear unit root tests suffer from low power against the stationary nonlinear alternative. Implementing the nonlinear unit root tests proposed by Kapetanios, et al. (2003) and Cerrato, et al. (2009) for the relative stock prices of Emerging Asian markets, we find strong evidence of nonlinear mean reversion, whereas linear tests fail to reject the unit root null for most cases. We also report some evidence that stock markets in China and Taiwan are highly localized.
A number of researchers have found that the rate of exchange rate pass-through (ERPT) to domestic... more A number of researchers have found that the rate of exchange rate pass-through (ERPT) to domestic prices has declined substantially over the last few decades. We revisit this claim of a shrinking exchange rate e¤ect on the Consumer Price Index (CPI) in a vector autoregressive (VAR) model for US macroeconomic data under the current ‡oating exchange rate regime. Our VAR approach nests the conventional single equation method and reveals statistically signi…cant evidence of ERPT to the CPI only during later observations, sharply contrasting with previous …ndings. After con…rming structural breaks in ERPT via statistical tests by Hansen (2001) and Qu and Perron (2007), we seek the source with disaggregated level CPIs, and pin down a key role of energy prices. US energy imports increased from the 1990s until the recent recession. This market changes magnify the e¤ects of the exchange rate shocks on domestic energy prices, resulting in greater responses of the total CPI via the energy price channel.
This paper empirically investigates the determinants of key benchmark interest rates in China usi... more This paper empirically investigates the determinants of key benchmark interest rates in China using an array of constrained ordered probit models for quarterly frequency data from 1987 to 2013. Specifically, we estimate the behavioral equation of the People's Bank of China that models their decision-making process for revisions of the benchmark deposit rate and the lending rate. Our findings imply that the PBC's policy decisions are better understood as responses to changes in inflation and money growth, while output gaps and the exchange rate play negligible roles. We also implement in-sample fit analyses and out-of-sample forecast exercises. These tests show robust and reasonably good performances of our models in understanding dynamics of these benchmark interest rates.
In the Kehoe and Midrigan (2007) model, the persistence parameter of the real exchange rate is cl... more In the Kehoe and Midrigan (2007) model, the persistence parameter of the real exchange rate is closely related to the measure of price stickiness in the Calvo-pricing model. When we employ this view, Rogoff's (1996) 3 to 5 year consensus half-life implies that firms update their prices every 18 to 30 quarters on average. This is at odds with most estimates from U.S. aggregate data when single equation methods are applied to the New Keynesian Phillips Curve (NKPC), or when system methods are applied to Dynamic Stochastic General Equilibrium (DSGE) models that include the NKPC. It is well known, however, that there is a large degree of uncertainty around the consensus half-life of the real exchange rate. To obtain a more efficient estimator, this paper develops a system method that combines the Taylor rule and a standard exchange rate model to estimate half-lives. We use a median unbiased estimator for the system method with nonparametric bootstrap confidence intervals, and compare the results with those from the single equation method typically used in the literature. Applying the method to the real exchange rates of 18 developed countries against the U.S. dollar, we find that most of the half-life estimates from the single equation method fall in the range of 3 to 5 years with wide confidence intervals that extend to positive infinity. In contrast, the system method yields median-unbiased estimates that are typically shorter than one year with much sharper 95% confidence intervals, most of which range from 3 quarters to 5 years. These median unbiased estimates and the lower bound of the confidence intervals for the half-lives of real exchange rates are consistent with most estimates of price stickiness using aggregate U.S. data for the NKPC and DSGE models.
International Review of Economics & Finance, Sep 1, 2015
We estimate dynamic conditional correlations of financial asset returns across countries by an ar... more We estimate dynamic conditional correlations of financial asset returns across countries by an array of multivariate GARCH models and analyze spillover effects of the recent US financial crisis on 5 emerging Asian countries. We find a symptom of financial contagion around the collapse of Lehman Brothers in September 2008. There appears to be a regime shift to substantially higher conditional correlations that persisted for a fairly short-period of time. We also propose a novel approach that allows simultaneous estimations of the conditional correlation coefficient and the effects of its determining factors over time, which can be used to identify channels of spillovers. We find the dominant role of foreign investment for the conditional correlations in international equity markets. The dollar Libor-OIS spread, the sovereign CDS premium, and foreign investment are found to play significant roles in foreign exchange markets.
This paper empirically investigates potential effects of economic recessions on consumers' decisi... more This paper empirically investigates potential effects of economic recessions on consumers' decision-making process for leisure activities using the Consumer Expenditure Survey data during the Great Recession. We employ the Probit model to study how changes in income affect the likelihood of making nonzero expenditures on entertainment activities. Recognizing the presence of a high degree of censoring, we employ the Tobit model to assess the income effect on recreational activities to avoid bias in the least squares estimator for the latent coefficients. Income coefficient estimates are significantly positive in all years we consider, confirming that leisure is a normal good. However, we observe statistically significant decreases in the income coefficient during recession years in two out of three categories of leisure activities. That is, the responsiveness of consumption to income changes decreases during recession years, which implies a sluggish adjustment in leisure expenditures when economic distress is elevated.
This paper studies dynamic adjustments of 49 world commodity prices in response to innovations in... more This paper studies dynamic adjustments of 49 world commodity prices in response to innovations in the nominal exchange rate and the world real GDP. After we estimate the dynamic elasticity of the prices with respect to these shocks, we obtain the kernel density of our estimates to establish stylized facts on the adjustment process of the commodity price toward a new equilibrium path. Our empirical …ndings imply, on average, that the law of one price holds in the long-run, whereas the substantial degree of short-run price rigidity was observed in response to the nominal exchange rate shock. The real GDP shock tends to generate substantial price ‡uctuations in the short-run because adjustments of the supply can be limited, but have much weaker e¤ects in the long-run as the supply eventually counterbalances the increase in the demand. Overall, we report persistent long-lasting e¤ects of the nominal exchange rate shock on commodity prices relative to those of the real GDP shock.
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