Alfred A. Haug

Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration

This paper employs response surface regressions based on simulation experiments to calculate asymptotic distribution functions for the Johansen-type likelihood ratio tests for cointegration. These are carried out in the context of the models recently proposed by Pesaran, Shin, and Smith (1997) that allow for the possibility of exogenous variables integrated of order one. The paper calculates critical values that are very much more accurate than those available previously. The principal contributions of the paper are a set of data files that contain estimated asymptotic quantiles obtained from response surface estimation and a computer program for utilizing them. This program, which is freely available via the Internet, can be used to calculate both asymptotic critical values and P-values.

Oil Prices, Exchange Rates and Emerging Stock Markets

While two different streams of literature exist investigating 1) the relationship between oil prices and emerging market stock prices and 2) the relationship between oil prices and exchange rates, relatively little is known about the dynamic relationship between oil prices, exchange rates and emerging market stock prices. This paper proposes and estimates a structural vector autoregression model to investigate the dynamic relationship between these variables. Impulse responses are calculated in two ways (standard and projection based methods). The model supports stylized facts. In particular, positive shocks to oil prices tend to depress emerging market stock prices and US dollar exchange rates in the short run. The model also captures stylized facts regarding movements in oil prices. A positive oil production shock lowers oil prices while a positive shock to real economic activity increases oil prices. There is also evidence that increases in emerging market stock prices increases oil prices.

Temporal Aggregation and the Power of Cointegration Tests: A Monte Carlo Study

The effect of time-aggregation on the power of commonly used tests for cointegration is studied with the Monte Carlo method. The results suggest that, for a given span, a higher frequency of observation can add substantially to test power. Also, Engle and Grangers (1987) ADF test leads overall to the highest and most stable powers for typical finite sample sizes and likely data generating processes encountered by practitioners. Copyright 2002 by Blackwell Publishing Ltd

Cointegration and Government Borrowing Constraints: Evidence for the United States

Testable implications are derived in a present-value borrowing-constraint model for the U.S. federal government. Critical values for unit-root and cointegration tests are calculated with Monte Carlo studies. Cointegration techniques are employed to determine whether the government has been involved in perpetual debt financing in recent years. The data reject this assertion.

European Monetary Union: A Cointegration Analysis

This paper employs systems-based cointegration techniques developed by Johansen (1988, 1995) to determine which European Union countries would form a successful Economic and Monetary Union (EMU), based on long-run behavior of the nominal convergence criteria laid down in the Maastricht treaty. The original 12 European Union countries are analyzed together. Nominal exchange rates, real exchange rates, longterm interest rates, and government budget deficits are each analyzed for co-movements among the 12 countries and various subgroups of them. The results suggest that not all of the 12 original countries of the European Union could possibly form a successful EMU over time, unless several countries made significant adjustments.

Long-Run Money Demand in Canada: In Search of Stability

The authors search for a long-run cointegrating relationship among real money balances, real income, and interest rates, extending the work of Steve Ambler and Algin Paquet (1990), who explore this issue in the Canadian context employing the methods of Robert F. Engle and Clive W. Granger (1987). First, they uncover parameter estimates of the cointegrated relationships using three different methods of estimation. Second, the authors employ the Hansen (1992) procedure to search for structural instability in cointegrating relationships with unknown break points. They find empirical support for a stable cointegrating relationship among real M1, real income, and short-term interest rates in Canada for the period 1953:1-1990:4. Copyright 1996 by MIT Press.

Residual based tests for cointegration: A Monte Carlo study of size distortions

Abstract This paper compares seven residual based tests for cointegration with the Monte Carlo method. First-order moving average components lead to substantial size distortions for all tests. Among the tests considered, Engle and Grangers ( Econometrica , 1987, 55, 251–276) augmented Dickey-Fuller (ADF) test show the least size distortions.

Tariffs and quotas under dynamic duopolistic competition

Abstract This paper analyzes tariffs and quotas in a differential game model of duopolistic competition. For a homogeneous good, equal import tariffs and quotas are compared with respect to resulting domestic prices. The open-loop and closed-loop (subgame perfect) equilibria are derived. The open-loop game leads to domestic price equivalence; however, the closed-loop game does not, unless firms are myopic or the number of domestic firms becomes large. Thus, we prove that the equivalence for static Cournot competition does not carry over to the dynamic case.

Blanchard's Model of Consumption: An Empirical Study

This paper derives several empirically testable implications for O. J. Blanchards (1985) consumption model that has been widely used in analytical macroeconomic research. Cointegration methods are applied. The parameter that measures the life horizon of households is estimated and the consumption model is tested. Quarterly Canadian data are used. There is no empirical evidence against the assumption that households behave as if they live forever within Blanchards framework. However, Blanchards model of consumption is strongly rejected by the data.

Linear or Nonlinear Cointegration in the Purchasing Power Parity Relationship

We test long-run Purchasing Power Parity (PPP) within a general model of cointegration of linear and nonlinear form. Nonlinear cointegration is tested with rank tests of Breitung (2001). We determine first the order of integration of each variable, using monthly data from the post-Bretton Woods era for G-10 countries. In many cases prices are I(2), whereas all exchange rates are I(1). However, there are several countries that have a price level that linearly cointegrates with the US price level so that this combination is I(1). Overall, we find some, though limited, evidence for nonlinear and also linear cointegration for the weak version of PPP.