Long Run Macroeconomic Relations in the Global Economy

58 Pages Posted: 18 Oct 2010

See all articles by M. Hashem Pesaran

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

Sean Holly

University of Cambridge - Department of Applied Economics

Stephane Dees

European Central Bank (ECB)

L. Vanessa Smith

University of York - Department of Economics and Related Studies

Multiple version iconThere are 3 versions of this paper

Date Written: 2007

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.

Keywords: Global VAR, Fisher relationship, Uncovered Interest Rate Parity, Purchasing Power Parity, persistence profile

JEL Classification: E17, F47, R11, C32

Suggested Citation

Pesaran, M. Hashem and Holly, Sean and Dees, Stephane and Smith, L. Vanessa, Long Run Macroeconomic Relations in the Global Economy (2007). Economics: The Open-Access, Open-Assessment E-Journal, Vol. 1, 2007-3, Available at SSRN: https://ssrn.com/abstract=1691873 or http://dx.doi.org/10.5018/economics-ejournal.ja.2007-3

M. Hashem Pesaran (Contact Author)

University of Southern California - Department of Economics

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

Sean Holly

University of Cambridge - Department of Applied Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DE
United Kingdom
+44-1223-335251 (Phone)

Stephane Dees

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

L. Vanessa Smith

University of York - Department of Economics and Related Studies ( email )

Heslington
University of York
York, YO10 5DD
United Kingdom

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