Jack Strauss

Stock prices and domestic and international macroeconomic activity: a cointegration approach

Abstract This paper supports the existence of a significant, long-run relationship between stock prices and domestic and international economic activity in six European economies. Johansen Cointegration tests demonstrate that stock price levels are significantly related to industrial production, business surveys of manufacturing orders, short- and long-term interest rates as well as foreign stock prices, short-term interest rates and production. Variance decomposition methods support the strong explanatory power of macroeconomic variables in contributing to the forecast variance of stock prices. Hence, stock prices are determined by macroeconomic activity.

Shortfalls of panel unit root testing

Abstract This paper shows that (i) magnitude and variation of contemporaneous correlation are important in panel unit root tests, and (ii) demeaning across the panel usually does not eliminate these problems.

Panel unit root tests of purchasing power parity for price indices

Abstract This paper adopts four panel unit root tests to evaluate PPP over the floating period for six different price indices. Results generally support PPP, albeit the speeds of adjustment differ considerably between price indices and test procedures. The degree of contemporaneous and serial correlation as well as heterogeneity of the series in the panel affect stationarity and the speed of mean reversion.

Productivity differentials, the relative price of non-tradables and real exchange rates

Abstract This paper reconciles the apparent contradiction between recent panel unit root tests of real exchange rates and the productivity differential model, proposing an alternative view that explains the coexistence of such findings. Real exchange rates and the relative price of non-tradables reflect the gradual adjustment of mean-reverting and endogenously competing factors: supply and demand shocks as well as traded goods arbitrage. Granger causality and variance decomposition results indicate substantial simultaneity and feedback effects between real exchange rates, the relative price of non-tradables and productivity differentials.

Panel Unit-Root Tests of OECD Stochastic Convergence

This paper uses three panel unit-root tests and finds that real per capita GDP for OECD countries and a European subsample converge stochastically for the period 1948-87 but not for the entire sample of 1900-87. For the postwar period, the differential in income gaps or speed of adjustment is eliminated at an annual rate of 4-8% for OECD economies, and 6-9% for European economies. Copyright 2001 by Blackwell Publishing Ltd.

Real Exchange Rates, PPP and the Relative Price of Nontraded Goods

The purchasing power parity hypothesis (PPP) states that nominal exchange rates move with differences in relative prices between economies. The theory has received considerable attention in the economic literature since Cassell [6], and is the foundation of many long-run theoretical hypotheses in international finance; yet, its empirical validity remains in question. Many tests of PPP focus on the stationarity of the real exchange rate, the nominal exchange rate adjusted for changes in price levels between economies. If domestic and foreign price levels and the nominal exchange rate are integrated, then cointegration between these variables implies the existence of both a long-run equilibrium relationship and PPP. The residual, the real exchange rate, then follows a stationary process. The paper uses the multivariate cointegration methodology of Johansen [16] and Johansen and Juselius [17; 18] to examine the source of real exchange rate nonstationarity. Is the nonstationarity due to shifts in the domestic and foreign price of nontradeables or productivity differentials between traded and nontraded sectors? Or is the nonstationarity a possible outcome of difficulties in intercountry comparisons of prices movements associated with construction of these price indices? Most research finds the real exchange rate follows a nonstationary process due to the presence of a unit root [8; 12; 1; 9; 19; 27]. However, the existence of a variable trend in the real exchange rate does not imply the absence of a long-run relationship between relative prices levels and nominal exchange rates for two reasons. First, a long-run relationship between price levels and nominal exchange rates may exist but not the one-for-one relationship implicit in the calculation of real exchange rates due to measurement differences in the construction of price indices between economies. Second, PPP violations may occur due to the presence of permanent productivity innovations which affect the relative price of nontradeables. If these shocks are not represented by measurable variables, a cointegrating relationship will not exist. The paper constructs traded and nontraded GDP price indices and productivity rates for 14 OECD economies, and tests: (1) if the variable trend (the nonstationary process) in the real exchange rate is due to permanent innovations in relative price of domestic and foreign nontradeables; (2) if long-run PPP violations are due to permanent movements in the relative price of nontradeables; (3) if the nonstationarity in the real exchange rate is due to permanent innovations in domestic and foreign productivity differentials between the traded and nontraded sectors; (4) if the variable trend in the relative price of nontradeables is due to permanent innovations in productivity between sectors. Lastly, the paper constructs a cointegrating error correction model

Bagging or Combining (or Both)? An Analysis Based on Forecasting U.S. Employment Growth

Forecasting a macroeconomic variable is challenging in an environment with many potential predictors whose predictive ability can vary over time. We compare two approaches to forecasting U.S. employment growth in this type of environment. The first approach applies bootstrap aggregating (bagging) to a general-to-specific procedure based on a general dynamic linear regression model with 30 potential predictors. The second approach considers several methods for combining forecasts from 30 individual autoregressive distributed lag (ARDL) models, where each individual ARDL model contains a potential predictor. We analyze bagging and combination forecasts at multiple horizons over four different out-of-sample periods using a mean square forecast error (MSFE) criterion and forecast encompassing tests. We find that bagging forecasts often deliver the lowest MSFE. Interestingly, we also find that incorporating information from both bagging and combination forecasts based on principal components often leads to further gains in forecast accuracy.

The cointegrating relationship between productivity, real exchange rates and purchasing power parity

Abstract Johansen cointegration and hypotheses tests indicate that a statistically significant cointegrating relationship exists between domestic and foreign productivity differentials and the real exchange rate. Increases in the domestic productivity of traded goods (relative to the domestic productivity of nontraded goods) appreciates the real exchange rate in all six economies. Conversely, increases in the foreign productivity of traded goods causes a real exchange rate depreciation in four of the six economics.

The Linkage between Prices, Wages, and Labor Productivity: A Panel Study of Manufacturing Industries

This article investigates the long-run relationship between prices and wage-adjusted productivity as well as between real wages and average labor productivity at the industry level for a panel of 459 U.S. manufacturing industries over the period 1956–1996. Panel cointegration test results strongly reject the null of no cointegration in the panel between both prices and wage-adjusted productivity and between labor productivity and real wages for many (but not all) industries. Granger-causality tests show that prices are weakly exogenous and cause movements in unit labor cost. Bidirectional Granger causality is found between real wages and productivity; however, a one-to-one relationship is strongly rejected between real wages and productivity. Increases in labor productivity are associated with a less than unity increase in real wages.

Cointegration tests of purchasing power parity: the impact of non-traded goods

Abstract This paper explores the relationship between non-traded goods relative prices and the real exchange rate. We apply the Johansen maximum likelihood procedure to two different data sets of traded and non-traded prices. First, we develop a model which highlights the importance of non-traded relative price movements in causing deviations in the real exchange rate away from PPP. We find a strong association. A rise (fall) in the domestic relative price of non-traded goods is associated with an appreciation (depreciation) in the real exchange rate while the opposite is true for the foreign relative price. We conclude that non-traded goods relative price movements are an important determinant of real exchange rate behavior.