Mark J. Holmes

Does long-run real interest parity hold among EU countries? Some new panel data evidence

Abstract This paper tests for long-run ex post real interest parity (RIP) among the major European Union (EU) countries over the period 1979–1998 using a new test, due to Im, Pesaran, and Shin (1997) , that allows one to confirm or reject RIP depending on whether a panel data set comprising real interest differentials is stationary or not. This methodology offers substantial advantages over the univariate Augmented Dickey Fuller (ADF) tests that might accept the null of non-stationarity on account of low test power. Strong evidence of onshore RIP occurs during 1986–1990 and 1993–1998 with the half life of a random shock to parity estimated at 2–3 months. There is no evidence of RIP during 1990–1993 despite the easing of remaining capital controls in 1990.

Exchange rate regimes and economic convergence in the European Union

Tests for long‐run macroeconomic convergence among European Union (EU) countries according to the various exchange rate regimes that have prevailed over the last 40 years. Applying a recently developed test to the monthly index of industrial production data, output convergence is confirmed or rejected depending on whether or not the first largest principal component based on benchmark deviations with respect to Germany is stationary or not. It is argued that this methodology has key advantages over existing cointegrating and common trends procedures. For most EU countries, there is evidence of increased macroeconomic convergence during the 1990s, where evidence is particularly strong for Belgium, France and The Netherlands. The evidence also indicates that the Snake era of the 1970s was more conducive towards convergence than the initial exchange rate mechanism period of 1979‐1992. Firm evidence of convergence is lacking for Austria, Finland and Sweden, who joined the EU in 1995, and for a sample of non‐EU countries.

Poland: a successful transition to budget sustainability?

Abstract In this paper we evaluate the sustainability of the current fiscal policy regime in Poland, using as framework the intertemporal budget constraint (IBC). Consistency of fiscal policy with the IBC is evaluated using unit root and cointegration tests. In contrast to much previous research on fiscal sustainability, we take account of the possible role of seignorage from money creation as a source of government revenue, by conducting sustainability tests excluding, and then including, seignorage. We find evidence that Polish fiscal policy is sustainable, and that the fiscal regime is ‘expenditure-led’, adjusting tax revenues to the planned levels of government expenditures.

Inflation Convergence in the ERM: Evidence for Manufacturing and Services

Recent studies have concluded that the ERM has facilitated some degree of inflation convergence among its members with limited evidence of German leadership. These conclusions are based on national inflation measures which reflect aggregated output thereby masking different experiences at the sectoral level. This study examines inflation convergence in the ERM for manufacturing and service sector output using time-varying parameter analysis, common trends analysis and tests for weak exogeneity. For both sectors, there is no evidence of German leadership. Inflation convergence in manufacturing inflation, though limited, is more advanced than in services. [E3, F0, F4]

Oil Price Shocks and the Asymmetric Adjustment of UK Output: A Markov-switching approach

This paper examines the role played by real oil price shocks in influencing the growth in UK GDP. Our particular interest is the possibility that asymmetries might exist in such a relationship. Using Hamiltons regime-switching estimation, we consider whether oil price shocks influence both the deepness and duration of the business cycle. We find that asymmetries arise insofar as oil price appreciation is most likely to curtail the duration of the expansionary phase of the business cycle. This result is in contrast to existing studies of the oil price-macroeconomy relationship that have largely concerned the US.

Changes in the degree of financial integration within the European Community in the 1980s: Some econometric tests

Investigates the hypothesis of increased financial integration within the European Union (EU) based on an examination of covered and nominal interest rate differentials between March 1979 and August 1992 using cointegration and time‐varying parameter econometric techniques. Discovers evidence of increased financial integration from about 1983, although this is not universal for all countries within the EU. In particular the UK seems to have more financial independence, perhaps reflecting its non‐membership of the exchange rate mechanism, while Belgium is the country most closely tied to German monetary policy.

Some new evidence on exchange rates, capital controls and European Union financial integration

Abstract We tested for financial integration among the major European Union countries using a new test, developed by Im, Pesaran, and Shin (1997) , that allowed us to confirm or reject covered interest rate parity depending on whether a panel data set comprising covered interest differentials is stationary or not. Employing a panel data unit root test offers substantial advantages over the univariate Augmented Dickey Fuller tests that might accept the null of nonstationarity on account of low test power. Despite the turbulence in the exchange rate mechanism during the early 1990s, we find evidence of onshore covered interest parity and therefore of financial interdependence of domestic interest rates.

Housing equity withdrawal and the average propensity to consume

This study explains the behaviour of the average propensity to consume for durable and non-durable expenditure in the UK during 1980–91. Explicit attention is paid to the role of housing wealth and in particular, equity withdrawal which has become more prominent as a result of financial deregulation. Long-run relationships are estimated using the Johansen procedure and from this reasonable short-run equations are obtained. The results indicate positive impact from housing equity withdrawal on the average propensity to consume.

Non-Linearities, Regime Switching and the Relationship Between Asian Equity and Foreign Exchange Markets *

This paper explores the possibility of a non-linear relationship between Asian equity and foreign exchange markets. The non-linearity is modeled using a regime-switching Markov model. We find evidence of non-linearities where the effect of changes in the exchange rate on stock market returns is regime-dependent except for Hong Kong whose strong currency peg contributes into the segmentation of its stock and foreign exchange markets. Using a quadratic approximation, we find only limited evidence of non-linearities within each regime. The results lend little support to the proposition that moderate depreciations are associated with increases in stock returns while large ones, short of a currency crash, have negative effects on equity markets.

The Velocity of Circulation: Some new evidence on international integration

This study tests for the integration of money velocity movements among the major European Union countries. For this purpose, a new test is employed that allows one to confirm or reject integration on the basis of whether or not the first largest principal component, based on deviations of velocity growth rates from a base country, is stationary. Using monthly data covering the last 25 years, this study finds that integration was strongest during the 1970s and during 1983-92. These findings modify the institutionalist view that common financial developments have meant that velocities have moved together on an upward secular trend over the last 40 years. Developments with regard to currency substitution along with exchange rate policy and capital controls can affect relative interest rates and income movements and therefore the co-movements in money velocities.