Leo Michelis

Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration

This paper employs response surface regressions based on simulation experiments to calculate asymptotic distribution functions for the Johansen-type likelihood ratio tests for cointegration. These are carried out in the context of the models recently proposed by Pesaran, Shin, and Smith (1997) that allow for the possibility of exogenous variables integrated of order one. The paper calculates critical values that are very much more accurate than those available previously. The principal contributions of the paper are a set of data files that contain estimated asymptotic quantiles obtained from response surface estimation and a computer program for utilizing them. This program, which is freely available via the Internet, can be used to calculate both asymptotic critical values and P-values.

European Monetary Union: A Cointegration Analysis

This paper employs systems-based cointegration techniques developed by Johansen (1988, 1995) to determine which European Union countries would form a successful Economic and Monetary Union (EMU), based on long-run behavior of the nominal convergence criteria laid down in the Maastricht treaty. The original 12 European Union countries are analyzed together. Nominal exchange rates, real exchange rates, longterm interest rates, and government budget deficits are each analyzed for co-movements among the 12 countries and various subgroups of them. The results suggest that not all of the 12 original countries of the European Union could possibly form a successful EMU over time, unless several countries made significant adjustments.

Regional convergence in Greece in the 1980s: an econometric investigation

The purpose of this paper is to evaluate empirically regional convergence in Greece during the 1981–1991 period of participation in the European Economic Community (EEC). Census data at NUTS III level of regional disaggregation are used. A number of structural policies undertaken in the 1980s, motivated by membership in the EEC, were conducive to regional convergence among the 51 NUTS III regions of Greece. Four different dependent variables and three model specifications are used to test the hypothesis of regional convergence. The overall evidence does not reject the idea of regional convergence. The estimated convergence coefficients are relatively similar across the three model specifications but they vary with the dependent variable used to measure convergence.

The Dependence Structure Between the Canadian Stock Market and the USD/CAD Exchange Rate: A Copula Approach

This paper investigates the dependence structure between the real Canadian stock returns and the real USD/CAD exchange rate returns, using the Symmetrized Joe-Clayton (SJC) copula function. We estimate the SJC copula with monthly data over the period 1995:1 to 2006:12. Our results show significant asymmetric static and dynamic tail dependence between the real stock returns and the real exchange rate returns, such that the two returns are more dependent in the left than in the right tail of their joint distribution. We explain this asymmetric dependence in terms of an asymmetric interest rate policy by Canadian monetary authorities in response to changes in the real exchange rate during sub-periods of falling and rising commodity prices.

The term structure of interest rates in the 12 newest EU countries

This article uses cointegration and common trends techniques to investigate empirically the expectations hypothesis of the term structure of interest rates for the 10 new EU countries, along with Bulgaria and Romania. The empirical results support the expectations theory of the term structure for all countries except Malta. By decomposing each term structure into its transitory and permanent components, we also analyse short-run and long-run interdependence among the term structures of interest rates in these countries. Our results indicate only weak linkages among the term structures of the 10 new EU countries and strong linkages between Bulgaria and Romania joined the EU in 2007.

The distributions of the J and Cox non-nested tests in regression models with weakly correlated regressors

Abstract This paper examines the asymptotic null distributions of the J and Cox non-nested tests in the framework of two linear regression models with nearly orthogonal non-nested regressors. The analysis is based on the concept of near population orthogonality (NPO), according to which the non-nested regressors in the two models are nearly uncorrelated in the population distribution from which they are drawn. New distributional results emerge under NPO. The J and Cox tests tend to two different random variables asymptotically, each of which is expressible as a function of a nuisance parameter, c, a N (0, 1) variate and a χ2(q) variate, where q is the number of non-nested regressors in the alternative model. The Monte Carlo method is used to show the relevance of the new results in finite samples and to compute alternative critical values for the two tests under NPO by plugging consistent estimates of c into the relevant asymptotic expressions. An empirical example illustrates the ‘plug in’ procedure.

Measuring the contribution of durable goods to the welfare cost of inflation

In this paper, we measure the contribution of durable goods to the welfare cost of inflation, in the context of an endogenous growth model with durable and nondurable goods, where purchases of the latter require only a partial cash payment compared with the former. Unlike existing measures, our proposed welfare measure is computationally efficient and relatively easy to implement.We find that durability adds a significant component to the welfare costs of inflation.

SAVINGS, INVESTMENT, EMPLOYMENT, AND INFLATION IN A SMALL OPEN ECONOMY WITH HABIT PERSISTENCE

The effects of inflation are studied for a small open economy with a cash-in-advance constraint on consumption in which the representative agent has preferences with habit persistence. An increase in the inflation rate requires a fall in the steady state living standards. On impact, to maintain living standards, the representative agent reduces his savings and labor supply. Investment falls and the current account turns into a deficit. In support of this model, we provide evidence from eight high-inflation countries suggesting that after an increase in the inflation rate, output and investment fall, and the net foreign asset position deteriorates over time.