Lance A. Fisher

Financial Deregulation and the Dynamics of Money, Prices, and Output in New Zealand and Australia

Effects of financial deregulation in the 1980s on the dynamic interactions among money, prices and output in New Zealand and Australia are evaluated. Prior to deregulation, the series appear to be nonstationary and cointegrated based on Johansens maximum-likelihood tests, with money proportional to prices but less than proportional to output in the long run. The series also appear cointegrated in New Zealand through the 1980s when the effects of deregulation are accounted for with a deterministic shift parameter. The cointegrating coefficients are similar for the pre-liberalization and full-sample periods, and dynamic responses are evaluated for error-correction models incorporating the estimated long-run relationships. Copyright 1993 by Ohio State University Press.

Comparison of Box--Tiao and Johansen canonical estimators of cointegrating vectors in VEC(1) models

Abstract The Box—Tiao (1977) and Johansen (1988) approaches to estimating cointegrating vectors are compared and small-sample properties of the estimators are evaluated in Monte Carlo experiments for bivariate first-order models. In models without drift, the distributions of the Box—Tiao estimator are found to be less dispersed and leptokurtic in a variety of interesting cases. The presence of drift induces asymptotic normality in both estimators and again the distributions of the Box—Tiao estimator are often less dispersed in small samples.

Long-Run Identifying Restrictions for an Error-Correction Model of New Zealand Money, Prices and Output

Abstract Dynamic interactions among money, prices and output are modeled for New Zealand. We find evidence of one cointegrating relationship and two stochastic trends among these series and base structural inferences on long-run identifying restrictions of the type proposed for VEC models by King, Plosser, Stock and Watson (KPSW). Under the assumption that a monetary shock has no effect on output in the long-run, a productivity shock for which there is partial monetary accommodation explains most of the variability of output at all forecast horizons, whereas the monetary shock is the most important determinant of levels of money and prices. An alternative identifying restriction that imposes a long-run impact of a monetary shock on output results in less plausible dynamic effects.

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.

Permanent-Transitory Decompositions Under Weak Exogeneity

This note shows that the orthogonal shocks obtained by imposing a recursive structure on the contemporaneous impacts of the errors in a vector-error correction model (VECM) are related to the orthogonal permanent-transitory shocks in a Gonzalo and Ng (2001, Journal of Economic Dynamics and Control 25, 1527–1546) decomposition provided some of the variables in the system are weakly exogenous. Specifically, when there are as many weakly exogenous variables as common trends and the weakly exogenous variables are ordered first, the orthogonal shocks obtained directly from the VECM constitute a permanent-transitory decomposition, and the permanent shocks are identical to those in the Gonzalo and Ng decomposition.We are grateful to the co-editor Paolo Paruolo and an anonymous referee for useful comments, which have helped to improve the content and exposition of this note. Financial support from the Australian Research Council is gratefully acknowledged.

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.

Joint Implications of Consumption and Tax Smoothing

In this paper, the joint hypotheses of consumption and tax smoothing are shown to imply that the present value of expected proportionate declines in government non-interest outlays is approximately equal to a log-linear function of the budget deficit and private dissaving. In this exact linear relation, the budget deficit signals declines in future government outlays, after controlling for prospective changes in the tax base. Private dissaving controls for such prospective changes since, under the joint hypotheses, the present value of expected proportionate rises in tax revenues are approximately equal to a log-linear function of private dissaving. Both exact linear relations are tested in a VAR framework on annual post-World War II U.S. data. We find considerable empirical support for the theory.

Down the retirement risk zone with gun and camera

The retirement risk zone represents a fragile period in the financial life cycle of people in defined-contributions superannuation. It primarily affects people of middle means. Sequencing risk has been described as an independent risk but it has largely been a consequence of the dominant asset allocation strategy, described here as aggressive constant-mix. Lifetime glide paths should instead resemble a displaced V: the share of growth assets should fall by something like 20 to 50 percentage points over working life, then another 5 or 10 percentage points on the day of retirement, but should subsequently rise through retirement, by something like 20 to 30 percentage points.