Jyh-Lin Wu

Is Purchasing Power Parity Overvalued

The purpose of this paper is to re-examine the hypothesis of long-run Purchasing Power Parity among industrial countries under the current float using the panel data approach. We propose a new finite-sample panel data unit-root test procedure that allows for a general serial correlation structure and arbitrary contemporaneous correlation in model innovations across countries. This procedure is then applied to the recently developed panel data unit-root tests of Im, Pesaran and Shin (1996) and of Maddala and Wu (1999). The test results show sufficient evidence against the unit-root null for most samples. By comparing our results with the existing ones in the literature, we found that the method of assuming a restrictive serial correlation structure tends to weaken evidence against the unit-root null.

Mean reversion of the current account: evidence from the panel data unit-root test

Abstract Theoretically, the modern intertemporal model of current account determination implies the stationarity of the current account. However, the empirical finding in the literature indicates nonstationary current account balances based on conventional unit-root tests. Applying the panel data unit-root test of Im, Pesaran and Shin, we find support for the mean-reverting property of the current account. This, in turn, lends support to the intertemporal approach to the current account. The policy implication of our findings is that current account deficits in major industrial countries are sustainable.

Are current account deficits sustainable?: Evidence from panel cointegration

Abstract Conventional cointegration tests fail to consider information across countries, which leads to efficiency loss in estimation. In this article we apply panel cointegration tests to examine the cointegration between exports and imports among the G7. Our findings support the sustainability of current accounts among major industrial countries, which lends support to the intertemporal approach to the current account.

Testing for the sustainability of the current account deficit in two industrial countries

TThe objective of this paper is to test for the sustainability of the current account deficits in the U.S. and Canada over the 1973--1994 period. Using various unit root and cointegration tests some of which allow for structural changes, we conclude that the real current account deficits-to-GDP ratios are not sustainable.

A Re-examination of Real Interest Rate Parity

Empirical investigation based on consumer-price-index-based real interest rates is used to conclude that real interest rate parity is not supported. In this paper, the authors employ three panel-based unit-root tests, provided by Andrew Levin and Chien-Fu Lin (1992), Kyung So Im, Hashem M. Pesaran, and Yongcheol Shin (1995), and G. S. Maddala and Shaowen Wu (1996), to examine the stationarity of real interest differentials. Using monthly observations on Euro-market rates, they support the mean-reverting property of real interest differentials and, hence, the real interest rate parity. This finding is consistent with the observation that international integration of financial markets has increased dramatically since 1979.

Mean Reversion of Inflation Rates: Evidence from 13 OECD Countries

The stationarity of inflation has several important economic implications. This paper applies two recently developed panel unit root tests to re-examine the stationarity of inflation rates in 13 OECD countries. We provide strong empirical evidence to support the mean reversion of inflation rates. Our finding fails to support the accelerationist hypothesis, and it also points out that the conventional cointegration approach in analyzing the Fisher effect and the convergence of inflation rates may not be appropriate.

Tests for interest rate convergence and structural breaks in the EMS

We use a new test for cointegration that allows for structural breaks in the cointegrating relationship to test for bilateral interest rate convergence in the European Monetary System. Contrary to previous studies that employed standard cointegration tests, we find strong evidence for convergence between German nominal interest rates and interest rates in four other EMS countries in the 1979-1995 period.

A revisit to the dependence structure between the stock and foreign exchange markets: A dependence-switching copula approach

This paper develops a dependence-switching copula model to examine dependence and tail dependence for four different market statuses, namely, rising-stocks/appreciating-currency, falling-stocks/depreciating-currency, rising-stocks/depreciating-currency, and falling-stocks/appreciating-currency. The model is then applied to daily stock returns and exchange rate changes for six major industrial countries over the 1990–2010 period. The dependence and tail dependence among the above four market statuses are asymmetric for most countries in the negative correlation regime, but symmetric in the positive correlation regime. These results enrich the findings in the existing literature and suggest that analyzing cross-market linkages within a time-invariant copula framework may not be appropriate.

A Re-Examination of Purchasing Power Parity in Japan and Taiwan

Equilibrium models of real exchange rate determination, in the presence of transaction costs, imply a nonlinear adjustment process toward purchasing power parity (PPP). In this paper we re-examine the hypothesis of PPP allowing for the adjustment to follow a nonlinear process. For the country pairs of U.S.-Japan and U.S.-Taiwan during the period of 1974M1-1997M12 and 1980M1-1997M12, respectively, our results clearly reject the linear framework in favor of an exponential smooth transition autoregressive (ESTAR) process for PPP deviations. The results provide an alternative explanation for the failure of long-run PPP in the existing studies.

Are budget deficits "too large"?: The evidence from Taiwan

Abstract Are recent government budget deficits “too large”? Do they represent a boundless growth of government debt? Recently, these questions have received an immense amount of public attention in Taiwan. The methods of Gregory and Hansen (1996) and Stock and Watson (1993) are applied to examine the sustainability of Taiwans fiscal deficits from 1955–1994. We find that budget deficits have increased and have also persisted since 1989, but there is no evidence to suggest that the government tends to default on its debts. Therefore, we conclude that the budget deficit policy in Taiwan is sustainable.