Long Run Macroeconomic Relations in the Global Economy

77 Pages Posted: 6 Dec 2010

See all articles by Stephane Dees

Stephane Dees

European Central Bank (ECB)

Sean Holly

University of Cambridge - Department of Applied Economics

M. Hashem Pesaran

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

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 focuses on testing long run macroeconomic relations for interest rates, equity, prices and exchange rates within a model of the global economy. It considers a number of plausible long run relationships suggested by arbitrage in financial and goods markets, and uses the global vector autoregressive (GVAR) model developed in Dees, di Mauro, Pesaran and Smith (2007) 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. We find strong evidence in favour of the uncovered interest parity and to a lesser extent the Fisher equation across a number of countries, but our results for the PPP are much weaker. Also as to be expected, the transmission of shocks and subsequent adjustments in financial markets are much faster than those in goods markets.

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

JEL Classification: C32, E17, F47, R11

Suggested Citation

Dees, Stephane and Holly, Sean and Pesaran, M. Hashem and Smith, L. Vanessa, Long Run Macroeconomic Relations in the Global Economy (2007). Economics Discussion Paper No. 2007-7, Available at SSRN: https://ssrn.com/abstract=1719951 or http://dx.doi.org/10.5018/economics-ejournal.ja.2007-5

Stephane Dees

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Sean Holly

University of Cambridge - Department of Applied Economics ( email )

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

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

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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