Hans-Eggert Reimers

Long-Run Money Demand in the New EU Member States with Exchange Rate Effects

Within a wide range of other economic and financial indicators, money is highly relevant to the two-pillar monetary strategy of the European Central Bank for detecting risks to price stability over the medium term. Money demand models are a natural benchmark for assessing monetary developments. The existence of a well-specified and stable relation between money and prices can be perceived as a prerequisite for using monetary aggregates in the conduct of monetary policy, which is usually assessed within a money-demand framework. In this respect, the present analysis is important for the new member states of the European Union, as they are expected to join the euro area in future years. In this study, a money-demand analysis in the new member states is conducted using panel cointegration methods. A well-behaved long-run money demand relation can be identified only if the exchange rate is included as part of the opportunity cost. In the long-run cointegrating vector, income elasticity exceeds unity. Over the entire sample period, the exchange rate vis-à-vis the U.S. dollar turns out to be significant and a more appropriate variable in money demand than is the euro exchange rate.

Long-Run Links Among Money, Prices, and Output: World-Wide Evidence

Abstract Starting from the quantity theory of money we analyse the dynamic relationships between money, real output and prices for an unbalanced panel of 110 economies. Complementary to trivariate analyses we also adopt a P-star model explaining inflation via an equilibrium price level ( P-star), which in turn depends on potential output and money. A key issue of the paper is the cross-sectional stability of estimation and inference results. We find cointegration among the considered variables. Particularly for high inflation countries homogeneity between prices and money cannot be rejected. Given homogeneity we find evidence for an error-correction mechanism linking current price changes and the lagged price gap. Parameter estimates indicating the adjustment towards the price equilibrium are larger in absolute value for high inflation countries. The latter results indicate that central banks, even in high inflation countries, can improve price stability by controlling monetary growth.

Does Euro Area Membership Affect the Relation between GDP Growth and Public Debt

We analyse the relationship between the debt to GDP ratio and real per capita GDP growth for the euro area members by distinguishing between periods of sustainable and non-sustainable debt. Thresholds are theory-based and depend on the macroeconomic framework. If the interest rate exceeds nominal output growth, primary budget surpluses are required to achieve a sustainable debt ratio. The negative impact of the debt to GDP ratio is particularly strong for non sustainable ratios and especially relevant for the euro area. This suggests that the participation in monetary union might entail an additional risk for its members.

Forecasting of seasonal cointegrated processes

Abstract In this paper, forecasts of seasonally cointegrated models are analysed applying the ML-approach for seasonal cointegration suggested by Lee (1992). The forecasts of seasonally cointegrated models in fourth differences are compared with those in first differences, including seasonal dummies. The comparison is done by means of simulating various bivariate data generating processes containing seasonal cointegrating relationships. Forecasts are calculated for different specifications of lag length and cointegrating rank. One main result of the simulation study is that the models in first differences with seasonal dummies forecast smaller errors for short horizons than the seasonally cointegrated models. For longer forecast horizons models in fourth differences outperform the former. Furthermore, a model with more seasonal cointegrating relations than in the underlying model produces very high forecast errors. This is not affected by the choice of the lag length. Both modelling procedures are applied to the German income-consumption-wealth-process. The forecast results of the models confirm the evidence of the simulation study.

Seasonal Cointegration Analysis of German Consumption Function

The main purpose of this paper is to investigate the West-German consumption process depending on wealth and income with seasonal cointegration techniques using the framework of vector autoregressive models to capture the seasonal pattern of the series. The vector autoregressive models are the basis of a dynamic analysis by impulse response functions where the asymptotic distributions of the estimators are given. In the empirical part of the paper evidence is found for seasonal and nonseasonal cointegration relations among the variables. The response functions of consumption and income show a strong influence of wealth innovations. Moreover, income and consumption reactions present outstanding seasonal pattern.

Dealing with Benchmark Revisions in Real-Time Data: The Case of German Production and Orders Statistics

Benchmark revisions in non-stationary real-time data may adversely affect the results of regular revision analysis and the estimates of long-run economic relationships. Cointegration analysis can reveal the nature of vintage heterogeneity and guide the adjustment of real-time data for benchmark revisions. Affine vintage transformation functions estimated by cointegration regressions are a flexible tool, whereas differencing and rebasing work well only under certain circumstances. Inappropriate vintage transformation may cause observed revision statistics to be affected by nuisance parameters. Using real-time data of German industrial production and orders, the econometric techniques are exemplified and the theoretical claims are examined empirically. Copyright (c) Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2008.

The Role of Asset Markets for Private Consumption: Evidence from Paneleconometric Models

We explore the long and short run relationship between private consumption, disposable income and housing and financial wealth approximated by price indices for a panel of industrialized countries. Consumption, income and wealth are cointegrated in their common, but not in their idiosyncratic components. This stresses the relevance of inter-national spillovers to explain aggregate consumption behaviour. The cointegrating vector is robust and in line with the life cycle permanent income hypothesis. The in-come elasticity does not differ from unity, and wealth elasticities are within a range of 2 to 5 percent. According to the error correction mechanism, consumption could not be interpreted as a weakly exogenous series.

Seasonal cointegration analysis for German M3 money demand

Investigating the German money demand function the paper provides a vector autoregressive model that allows for cointegration at the zero frequency and at the seasonal frequencies. The sample period is 1975:1 to 1995:4 and thus contains the German unification period. Using prediction tests the employed model is found to be stable. The seasonal cointegration analysis is used to infer against price homogeneity of money demand and against scale invariance of holding money.

Testing the purchasing power parity in pooled systems of error correction models

In this paper we test the purchasing power parity for the post Bretton Woods period for 18 main industrial countries. As base currencies we use alternatively the Deutsche mark, the Japanese yen, and the US dollar. We employ error correction models for single countries and on the level of pooled equations allowing efficient inference on domestic and foreign price elasticities of nominal exchange rates. Likelihood ratio tests are applied to infer on linear restrictions implied by the economic relationship. Critical values for these tests are estimated by means of the wild bootstrap that copes with heterogeneous error distributions and contemporaneous correlation within a pooled system of single equations. Furthermore, the tests are performed recursively in order to address the issue of time dependence of our results. We find that the purchasing power parity provides an accurate description of exchange rate dynamics if the Deutsche mark or the Japanese yen are used as base currencies. Specified towards the US dollar we reject the economic model. It turns out that this overall conclusion is not invariant with respect to the investigated sample period.

Currency Substitution: A Theoretical and Empirical Analysis for Germany and Europe

The deutschmark is the anchor currency within the asymmetrical functioning of the European Monetary System (EMS). Thus the proper functioning of the monetary targeting strategy of the Bundesbank is a necessary prerequisite of the success of the system. This strategy relies heavily on stable monetary relations. Because of the big weight of the German monetary aggregate in a European aggregate this stability also has very important repercussions for monetary policy of the future European System of Central Banks. Currency substitution (CS) relative to other European currencies may cause instability in the German money demand equation. Theoretically there are arguments in favour of and against CS in the EMS. Empirically this phenomenon is analysed for a German money demand equation for M3. CS effects are investigated by testing the significance of CS variables in the short‐run dynamics of an error correction mechanism. In most cases there are no significant CS effects. Exceptions are Italy and the European Union as a whole, where the weight of currencies which have frequently depreciated against the deutschmark is high.