Hyeon-seung Huh

How well does the Mundell-Fleming model fit Australian data since the collapse of Bretton Woods?

Australian time series for the nominal interest rate, real output, the nominal exchange rate, prices and nominal money since 1973 are characterized by a vector autoregressive process driven by five exogenous disturbances. Those disturbances are identified so that they can be interpreted as the five main sources of fluctuations found in the Mundell - Fleming model of a small open economy under flexible exchange rates, namely: world interest rate, aggregate supply, IS, money supply and money demand shocks. The dynamic responses of the estimated model to the structural shocks are analysed and shown to match most of the predictions of the Mundell - Fleming model.

Real exchange rates, trade balances and nominal shocks: evidence for the G-7

Abstract To identify nominal shocks in structural VAR models of open economies, it is common practice to use purchasing power parity as a long-run identifying restriction so that there are no long-run effects of nominal shocks on real exchange rates. However, in some recent open economy intertemporal models with sticky prices, nominal shocks can have long-run effects on both real exchange rates and trade balances. In this paper, structural VAR models for the G-7 are identified in such a way that nominal shocks, at least potentially, can have long-run effects on a country’s real exchange rate. For the G-7, nominal shocks are found to have a significant long-run effect on each country’s trade balance over the post-Bretton Woods period. We do not have to appeal to hysteresis effects to explain this finding for trade balances, since nominal shocks are found to have a significant long-run effect on each country’s real exchange rate.

GDP growth and the composite leading index: a nonlinear causality analysis for eleven countries

Abstract This paper examines the ability of the composite leading index of economic activity to predict future movements in GDP growth using a nonlinear Granger causality test. Our empirical results are shown to contrast sharply with those from the conventional linear causality test.

Weak exogeneity and long-run and contemporaneous identifying restrictions in VEC models

Abstract This paper shows that under the King et al. (1991) approach [KPSW, 1991. Stochastic trends and economic fluctuations. American Economic Review 81, 819–840] to structural identification in VEC models, the structural shocks with transitory effects do not have a contemporaneous impact on the weakly exogenous variables. This result is used to establish the conditions under which the KPSW and Sims (1980) identification schemes [Macroeconomics and Reality. Econometrica 48, 1–48] are equivalent in a model of US consumption, investment and private output.

Structural Identification of Permanent Shocks in VEC Models: A Generalization

An econometric procedure to identify the permanent shocks in vector error correction models is proposed, which allows one to combine long-run and contemporaneous restrictions. This procedure is applied to the six-variable model of King, Plosser, Stock and Watson (1991) with a view to providing an alternative interpretation to their results based on a different identification scheme. We argue that a real spending shock in the place of the real interest rate shock appears to better accommodate their empirical findings.

IDENTIFICATION METHODS IN VECTOR-ERROR CORRECTION MODELS: EQUIVALENCE RESULTS

In a structural vector‐error correction (VEC) model, it is possible to decompose the shocks into those with permanent and transitory effects on the levels of the variables. Pagan and Pesaran derive the restrictions which the permanent–transitory decomposition of the shocks imposes on the structural VEC model. This paper shows that these restrictions are equivalent to a set of restrictions that are applied in the methods of Gonzalo and Ng and King et al. (KPSW). Using this result, it is shown that the Pagan and Pesaran method can be used to recover the structural shocks with permanent effects identically to those from the Gonzalo and Ng and KPSW methods. In the former case, this is illustrated in the context of Lettau and Ludvigsons consumption model and in the latter case in KPSWs six variable model. There are also two other methods for which the Pagan and Pesaran approach can deliver identical permanent shocks which are also discussed.

Financial Integration in East Asia: An Empirical Investigation

The central objective of this paper is to empirically evaluate the degree of linkages among East Asian equity and bond markets. Using data from the IMF’s Coordinated Portfolio Investment Survey (CPIS), we find that intra‐East Asian financial asset holdings of four East Asian countries – Japan, Korea, Hong Kong and Singapore – are larger than the levels predicted by the financial gravity model. However, our analysis suggests that this result is likely to be driven by intra‐regional trade linkages and reflect those linkages. Therefore, the salient implication for regional policymakers is that they should continue to promote intra‐regional financial integration. This paper also aims to analyse the impact of three different types of country‐specific risks – political, economic and financial risks – on investment from the four countries. This analysis yields a clear positive relationship between destination‐country risk, in particular political risk, and capital inflows.

A simple test of exogeneity for recursively structured VAR models

The restriction of exogeneity of certain variables in structural VAR models is rarely tested for consistency with the actual data. The reason is obvious: such a test requires estimates of the structural parameters. This paper proposes a solution for models that assume long-run or contemporaneous recursive structures in identification. We show that in such cases, the exogeneity restriction can be assessed statistically using the well-known Granger non-causality test which is conveniently performed in the reduced-form VAR model. Two empirical examples are offered to demonstrate the usefulness of this result.

Asymmetric Output Cost of Lowering Inflation: Empirical Evidence for Canada

A strand of theoretical and empirical evidence in the literature suggests non-linearity in the output-inflation relationship, viz. a non-linear Phillips curve. We develop a VAR model of output, inflation, and terms of trade augmented with logistic smooth transition autoregression specifications. Empirically, the model captures non-linear features present in the data. Output costs of reducing inflation vary, depending on the economy, size of inflation change, and whether policy makers seek to disinflate or prevent inflation from rising. Thus, inferences based on the conventional linear Phillips curve may provide misleading signals about the cost of lowering inflation and the appropriate policy stance.

Estimating Asymmetric Output Cost of Lowering Inflation for Australia

The purpose of this paper is to estimate the output cost associated with lowering inflation for Australia. The paper is particularly motivated by a strand of theoretical and empirical evidence in the literature suggesting nonlinearity in the output-inflation relationship, namely, a nonlinear Phillips curve. To accommodate this potentially important departure from linearity, a vector autoregression (VAR) model of output, inflation, and the terms of trade is augmented with logistic smooth transition autoregression specifications. My empirical results indicate that the model captures the nonlinear features present in the data well. Based on this nonlinear approximation, the output costs for reducing inflation are found to vary, depending critically on the state of the economy, the size of intended inflation change, and whether policymakers seek to disinflate or prevent inflation from rising. This implies that inferences based on the conventional linear Phillips curve may provide misleading signals about the cost of lowering inflation and thus the appropriate policy stance.