Long Run Macroeconomic Relations in the Global Economy
58 Pages Posted: 18 Oct 2010
Date Written: 2007
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: Suggested Citation