Pierre L. Siklos

Regime-Sensitive Cointegration With An Application To Interest-Rate Parity

There exist a variety of reasons for the failure to find a unique cointegrating relationship between economic time series where one would normally be expected on economic theory grounds. Among these are the testing procedure (e.g., Engle and Granger (1987) or Johansen (1991), the span of the data set (Hendry (1995), Perron (1989)), the choice of the lag length in generating the test statistic (Banerjee et al. (1993)), the presence of structural breaks (Gregory and Hansen (1996)), and the presence of cointegration only beyond some threshold (Balke and Fomby (1996)). In this paper we propose the concept of regime sensitive cointegration whereby the underlying series need not be cointegrated at all times. We show that cointegration can be switched off when a common stochastic trend is added. Alternatively, cointegration can be switched on or off because series normally believed to contain a unit actually do not. This implies that a linear combination of such variables need not be cointegrated. To illustrate the concept empirically, we test the hypothesis of interest rate parity, and related hypotheses, using daily eurorates for the US and Canada.

Convergence in Interest Rates and Inflation Rates across Countries and over Time

We examine the relationship between interest rates and inflation rates for 10 countries during the period 1974-95. We find evidence of a unique cointegrating relationship between nominal interest rates of European Monetary System (EMS) countries, the US and Canada, and the US, Germany, and Japan. No similar relationship is obtained between inflation rates with one exception, namely that between the US and Canada. We interpret these results as convergence in inflation but not in interest rates. Hence, if interest rates represent an indicator of monetary policy, the countries considered have attempted to implement independent policies but not to an extent which produced divergent trends in inflation. Copyright 1997 by Blackwell Publishing Ltd.

The role of seasonality in economic time series reinterpreting money-output causality in U.S. data

While empirical evidence on the relationship between money and income has mainly been presented using seasonally adjusted data, seasonally unadjusted data are used in this paper to examine the time series behaviour of money, real GNP, and industrial production, at both the seasonal and zero frequencies based on tests of cointegration and seasonal cointegration. Two important conclusions are reached in the paper. First, although the univariate time series properties of M1 and real GNP appear to be very similar at both the seasonal and zero frequencies, seasonal comovements of M1 and real GNP turn out to be different from long- run comovements. Second, when seasonally unadjusted data are used, there appears to be no long-run relationship between money (M1 or M2) and output in the sense that the null of no cointegration cannot be rejected.

The Effect of Canadian and U.S. M1 Announcements on Canadian Financial Markets: The Crow Years

This paper provides new evidence of the effect of weekly U.S. and Canadian M1 surprises on Canadian asset prices (stocks, T-bills, exchange rates) during the years John Crow was Governor of the Bank of Canada. In particular, we demonstrate the sensitivity of the evidence to the choice of econometric techniques. Our empirical results suggest that the Crow years marked an important change in monetary policy toward a more made in Canada policy. Consequently, US policy influences were relatively less important than in the past. Finally, international events associated, for example, with European Monetary System, produced unexpected effects in Canadian financial markets.

Income Velocity in Turbulent Times: The Role of Institutional Factors in the New Zealand Experience

Abstract The behavior of M3 velocity in New Zealand is examined using quarterly data since 1981. Cointegration and error-correction modeling demonstrates that a conventional model where velocity is a function of income and opportunity cost does not yield a long-run relationship. Instead, a model that incorporates measures of institutional change produces a stable equilibrium relationship. Thus, money demand, based on the M3 aggregate, is not unstable because stability has previously been defined too narrowly. Because the behavior of velocity in New Zealand is comparable to that of many industrialized countries in the period considered (1981–1994), our results have broader implications.